Investing in Cash is riskier than you think
What if there was a risk hiding in plain sight in your portfolio with absolutely no upside or reward?
We’re talking about the risk of keeping a large portion of your long-term savings in cash (or in cash equivalents like GICs or high-interest savings accounts).
True, cash is not exposed to the volatility of equity markets. But cash currently earns a low rate of return, and its value and purchasing power decline over time, when measured against the steadily rising cost of goods and services. As long as inflation exists, then your cash is virtually guaranteed to gradually lose value.
There are legitimate reasons to hold cash, particularly if you plan to use the funds in the near future. However, if you have a longer investing time horizon, you should put your cash to work and assume some calculated risk, in order to ensure those dollars will meet your future needs.
Just a small leak?
In the 1970s and 80s, annual inflation in Canada was much higher than it is now, and investors were more aware of the everyday impact of inflation on their portfolios.
In recent decades, however, the Bank of Canada has successfully kept Canada’s inflation rate relatively low, between one and three per cent. That said, a slow drip from a tiny hole in a bucket of water can empty the bucket over time.
That’s similar to the “slow drip” impact of inflation on your cash. Over long periods, it significantly erodes the purchasing power of your savings.
For example, over thirty years (a typical retirement planning timeframe), the purchasing power of $100,000 will gradually fall to just $55,207 if inflation averages 2%, or to as little as $30,882 if inflation climbs back up to 4%.
Understand this: holding too much cash in an effort to protect your funds from risk could dramatically reduce their future value.
Avoid hidden risk with a deliberate strategy
In practical terms, inflation creates a drag on investment growth, so, in order to increase your wealth, your investments must earn more than the rate of inflation. This is where other types of investments like mutual funds play a role in your portfolio.
It may be you’re uncertain how to invest in mutual funds. And you may be worried about market volatility.
I can help, by working with you to create a personalized investment plan, one that evaluates all your assets and considers your personal comfort level with risk. You can then move your cash “off the sidelines” and into an appropriate mix of professionally managed assets that respects your comfort level for risk and preserves your future spending power.
Book an appointment with me soon to review your assets and consider how well they match your current and future financial goals. Call: 250-787-0365
North Peace Saving & Credit Union / Credential Asset Management Inc.
The information contained herein is provided for general informational purposes only and is not intended to provide, and should not be relied upon as providing, legal, accounting, tax, financial, investment or other advice, or a solicitation to buy or sell any securities. Economic and market conditions are subject to change and past performance is not indicative of future results.
Mutual funds are offered through Credential Asset Management Inc. The information contained in this email was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete and it should not be considered personal taxation advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax related matters. This email is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds.
Christina Clarance, Wealth Advisor at North Peace Financial Planning Services Ltd. Fort St. John is a community that Christina and her family are proud to call home. Having lived in Fort St. John for 9 years, raising her children here, and having her immediate family and friends nearby, she has developed strong and steadfast roots to the region. Christina joined the credit union system in 2019 and felt an immediate connection with the values and…read more