Many people think that having money in cash is the safest investment of all, but in reality, it is the worst investment of all. Having cash is the only investment where you are guaranteed 100% to lose money.
How do you lose it?
You lose it to inflation, the silent killer of capital.
Why does inflation occur?
To create an economic stimulus, governments try to have a stable rate of inflation, both Canada and the US favor an inflation rate of about 2%.
The reason the government wants inflation is that the government wants to discourage people from holding money. If your money loses value day by day, then you are better off spending on goods and services. If people buy goods and services then businesses make money and this economic activity creates jobs.
Who is the big loser in the inflation game?
The poor and the financially ignorant are the big losers.
The poor are losers because every time prices increase the poor have to pay more for goods and services, but many times salaries don’t increase at the same rate as inflation, therefore the purchasing power is less and less.
The financial ignorant lose out because they don’t know how to invest their money in a way that will produce a rate of return higher than inflation.
Imagine this scenario:
Inflation is 2% and your bank offers you 1% interest for your money, at this rate your money is losing 1% power every year.
Here is Canada’s rate of inflation for the past 10 years.
2016: 1.50%
2015: 1.61%
2014: 1.47%
2013: 1.24%
2012: 0.83%
2011: 2.30%
2010: 2.35%
1009: 1.32%
2008: 1.16%
2007: 2.28%
It doesn’t seem like much, but assuming you had $10,000 in the year 2007. How much will it be worth today?
Your 10,000 would be worth $8,617.
This means that you lost 13.83% or your money. That’s a big hit.
So what to do?
If anything, don’t hold cash and don’t get investments that produce less than the inflation rate. Government bonds, generally don’t keep up with inflation.
Corporate bonds do a bit better than inflation, but the best of all is stocks.
Stocks are volatile, but in the long term have consistently outperformed other investments.
Good luck with your investments.
Update April 2020: I change my mind after the coronavirus
At this time we are going through the biggest economic downturn in history. This downturn was created by the coronavirus, a virus that has spread throughout the world.
The only way to fight the coronavirus effectively is through social distancing, which marks the end for any business where large crowds gather.
Most of the population is under lockdown. Millions have lost their jobs. The government is stepping in to help their citizens.
In these times of uncertainty, I have realized the importance of having cash. I am willing to accept a lower return in my overall portfolio in exchange for having some cash to help me out in these uncertain times.
This article was called “Cash is Trash” but in reality, cash can be a lifesaver. From now own, I will try to shoot for a one year, emergency fund, to help me get through difficult moments like the ones we are experiencing right now.
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- Currency diversification from the Canadain dollar
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