Cash is King! or is it..?
Is cash safe? Panic-selling is not the way forward.
When the markets crash, confusion and fear ensue and people panic-sell. However, selling up is not the best option.
People tend to think that commodities, equities and hedge funds are some of the riskier asset classes, however cash is most certainly not the safest option.
Here are a few reasons why:
- Cash is the worst performing asset class – over long periods it has underperformed all other major asset classes.
- You’re losing money when you leave cash sitting in a bank account. This is because you cannot keep up with inflation. If your investments are not keeping up with inflation, you are automatically losing purchasing power.
- Interest rates are at an all-time low – 0.05% is not an uncommon interest rate for a current account these days – and some banks even have negative interest rates just to look after your money!
- Timing the market does not work – you would need to know when to get out, when to go back in, pay all the relevant transaction charges each time (expensive), and will usually get it wrong. The Director of Research at Morningstar, a company that evaluates portfolio performance, stated that there is not a single example of a mutual fund beating the market over time by using the ‘market timing method’. Sitting it out and riding the wave is the way forward.
- The rush to cash-in often starts near the stock market bottom; at precisely the worst time.
Cash appears to be comforting because it does not move around much. It is easy to understand, and it does not “go down.” But in fact, it does decrease in value by not keeping up with inflation and losing the purchasing power, and it would not have any value in the event of a true collapse of the economy. It is always a good idea to have reserves of cash for the short term (4-6 months) but hoarding it is not the way forward.