Is cash still king?
Investments | 19/01/2022 |
6 min read
Bucks, coins, lobsters or pineapples, whatever you call it, cash has long been viewed as one of the safest investments available.
Looking ahead to 2022, is this still true? And what are the risks?
What are the benefits of investing in cash?
Cash investment options consist of money market securities, such as bank term deposits, bank bills and other liquid cash securities
Historically, cash is one of the lowest risk investment options you can choose. You have surety of your capital, immediate access to funds, and there’s less risk of losing money when compared to other investment options which can be much more volatile, such as shares. Returns are stable, but lower over the long term.
As an investment option, it can often benefit people with significant upcoming liabilities, or who need access to funds for big ticket purchases, such as buying a new house or car within a defined time frame. Or cash may be preferred for people in retirement.
However, if you look more closely there are certain elements of risk inherent in cash investments.
One risk is that cash can struggle to keep pace with inflation, which means the real value of your money goes down. Inflation erodes the purchasing power of money, and this can have a huge impact over long periods of time. Or to put it another way, imagine what $10 would have bought you in 1990 vs today. That’s inflation at work.
As we enter 2022, inflation is looking to be a concern for investment markets, with inflation in the US hitting a 40-year high in January 2022. However, returns from cash investments are much lower than this, meaning the purchasing power of cash has declined in this time. You can view our Cash option returns over the short-term and long-term via our investment returns table.
Meanwhile, the empty supermarket shelves that we saw across Australia as a result of the COVID-19 pandemic are an indication of the supply chain issues that are having a knock-on effect on inflation – supply is struggling to keep up with demand, pushing prices up.
If you’re holding your investments in cash for long periods of time you’ll end up with about the same amount, but what you can buy with it will be less than what you could have initially. This is the hidden risk of cash investments. It can significantly impact your retirement lifestyle over the long term. So it could be good to review how much of your super is held in cash.
The perceived safety of cash can also be its undoing.
During periods of market volatility people may be tempted to move their savings into a cash option. While this may buffer short term changes, it can also ‘lock in’ losses, rather than allowing for market corrections.
This happened to some people during the 2020 market crash prompted by the pandemic. A sharp investment drop in February 2020 saw some people transferring their balances to cash, only to then miss out on a huge market growth over the subsequent 12 months. Most members would have been better off ignoring the short-term panic and staying the course.
Understanding your investments
So – in many ways, cash is far from king.
As with all investments, it is an individual proposition. That means the level of risk, the need to make a big-ticket purchase, and life stage can all play an important part in determining investment strategy.
You can find out more about investing your money and assessing your current investments by talking to one of our financial planners.
Speak with a financial planner
Learn about your investment options and how they may impact your super balance and associated returns.
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