On 20 March 2020, a New York Times headline read, \u2018Some Big Investors Are Stockpiling Cash to Prepare for Whatever Comes Next.\u2019<\/b><\/p>\n
The coronavirus had struck \u2013 and nobody knew what to expect. A statewide stay-at-home order was issued that very day. Investors were scared.<\/p>\n
At that stage, US equities had been crashing for a month. They bottomed three days later\u2026 and have been marching up ever since.<\/p>\n
Since that headline appeared, the S&P 500, the main US market index, has gained 73%. Those big investors who stockpiled their cash must be kicking themselves.<\/p>\n
\nIn the UK, for example, returns on cash have been lower than inflation in every year since 2009<\/p>\n<\/blockquote>\n
Cash is not king. Not even close<\/b><\/h5>\n
This is not unusual. Two years ago we wrote about a Yahoo! Finance headline from late December 2018: \u2018The sexiest investment for 2019: Cash.\u2019 Global equities gained about 25% in 2019. That sexy investment was a disappointment.<\/p>\n
But it was expressing a widespread view. When times are tough and markets have been falling, many investors run to cash. Cash feels cautious. Cash feels sensible. Cash is king, right? You can sit and wait in cash until times get better.<\/p>\n
Now it\u2019s always useful to have some cash in your portfolio. Cash helps you to deal with unexpected demands and everyday crises. Cash is a buffer against the uncertainties of life.<\/p>\n
But cash is also a danger, which investors often don\u2019t appreciate. One problem is that it can get eaten up by inflation. In the UK, for example, returns on cash have been lower than inflation in every year since 2009.<\/p>\n
If you had put \u00a3100 in the bank in January 2009, it would now be worth about \u00a381 in real terms (taking consumer inflation into account). Over the last twelve years, holding cash would have chomped up one fifth of your buying-power \u2013 even before taxes and bank charges.<\/p>\n
A loser since the financial crisis<\/b><\/h5>\n
Normally, cash earns more than inflation. In the UK, this was true in every year between 1980 and 2008. Since the global financial crisis, though, cash has been a consistent loser. With cash rates still low, it\u2019s downright reckless to hold a cash ISA for a few years.<\/p>\n
Most investors don\u2019t need much cash. If you retire in your early sixties, say, and are reasonably healthy, you can expect to live for another twenty or thirty years. Many retirees should be investing a portion of their pension pots for the long term. They should hold a slug of equities, the best performing asset class over a decade or two.<\/p>\n
Between 1900 and 2020, for example, UK equities gained about 5.4% per year after inflation. Even after costs, long-term investors have done well. There were disaster years, of course, like 1974 when UK shares fell by half, but they recovered handsomely in due course.<\/p>\n
By contrast, cash returned only 1% per year after inflation over this 120-year period. The cost of safety and security returns one fifth of those of equity investors.<\/p>\n
For long-term investors, then, cash is an expensive luxury. Most people would be better off holding as little cash as possible and buying shares instead.\u00a0<\/p>\n
Any reference to specific instruments within this article does not constitute an investment recommendation.<\/i><\/b><\/p>\n