With inflation on the rise around the globe, could your cash deposits be better protected?
Cash is king. Or is it?
With all the savings and investment products on the market these days, it’s surprising just how many people adhere to the ‘cash is king’ mantra. They feel that holding cash in the bank is less risky than investing.
Unfortunately, cash is not as safe an asset as many people think.
Why cash is not king
It’s hard to listen to or hear the news right now without the word inflation cropping up. Most of us know that it is responsible for the price of our weekly shop soaring. If inflation is 10% (not far from the current UK rate) the basket of goods you bought this time last year for £100 will now cost you £110.
What you may not realise, is that the cash deposits that you have in the bank are also being eroded by inflation. If the rate of inflation is 10% and your savings are earning less than 10% interest over the same 12 months (and we challenge you to find a bank account that will pay 10% interest!), then the value of your money is decreasing in real terms. The greater the difference between the rate of inflation and the rate of interest, the greater the risk to your savings.
This chart shows how the value of £100 held in cash will be eroded by inflation over time:
If 10% inflation lasts for 7 years (let’s hope not but…), the value of your money will almost halve (not accounting for any interest you may earn).
How can you hedge against inflation?
Right now, it is tough. With inflation so high, bonds, usually considered to be a safe investment, are not the safe haven they usually are. Their fixed income does not keep up with higher prices.
The truth is, at current rates of inflation, most asset classes are struggling. But you have to keep your money somewhere. That’s why diversification is key. Diversifying internationally to increase exposure is a good strategy, as is diversifying amongst asset classes. Keeping a mix of stocks, bonds, commodities and real estate assets will give you the best protection against downside risk.
And don’t forget that it is the long-term horizon that is important. The current market slump is part of the cyclical nature of markets. It’s heartening to remember that historically, a diversified portfolio of shares has kept pace with rising prices over the long term.
In a letter to shareholders in 2009, Warren Buffet, arguably the most successful investor of all time, shared this advice “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”.
Could current prices mean that you get a great long-term deal by converting cash holdings to stocks?
While nothing is guaranteed, if you have a lot of cash in the bank, it is definitely worth looking at your investment options to protect against inflation. Make an appointment to speak to your financial adviser to discuss how your cash could be working harder for you.
Don’t have a financial adviser? If you are an expat in Asia, one of our highly experienced team would be happy to work with you to ensure that your financial planning is aligned to your long-term goals. Contact us to set up an introductory chat.
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