Many people think that having money in cash is the safest investments of all, but in reality, it is the worst investments of all. Having cash money 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 occurs.
In order to create 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 governments wants inflation is because the government wants to discourage people from holding money. If your money lose value day by day, then you are better off spending in 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 financial ignorant are the big losers.
The poor are losers because every time prices increases 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 loses out because they don’t know how to invest their money in a way which 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 the Canada’s rate of inflation for the past 10 years.
It doesn’t seem like much, but assuming you had $10,000 on 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 which 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 are stocks.
Stocks are volatile, but in the long term have have consistently outperformed other investments.
Good luck with your investments.
I am a money coach. If you want to talk about your investments, let’s talk.