Investors have been keeping record high levels of cash in their investment accounts and savings accounts. It’s a logical place to park money for a while. It’s relatively safe, readily accessible and a very common practice. Unfortunately, many investors are moving to cash without a strategy guiding them. So what’s the problem with having a high level of cash?
1) Your cash is earning next to nothing. The government is discouraging savings by keeping interest rates low. They are doing this to push investors into the market and to invest in stocks and bonds.
2) Low interest rates will likely continue. Janet Yellen, the incoming Fed Chair has signaled her intentions to maintain similar policies as her predecessor. These poor savings rates could continue for the next few years.
3) Inflation will slowly eat away at your purchasing power. This slow, ever-present issue catches many investors off guard.
4) In addition to inflation risk, you also face opportunity risk. Many investors sat in cash during the last few years, while the markets hit all time highs. That’s a missed opportunity.
Bottom line: The government is punishing you for saving, and rewarding you for investing.
You need to develop a strategy for your cash. It’s important to treat cash as an asset class. It needs to serve a specific role in the portfolio.
Contact us today if you’re interested in making your cash work harder.