Hi, this is Phil Calandra with Calandra Financial. With all the market-moving events of the past few months and few years, from the global pandemic, to the trade wars with china. It’s understandable that some investors may prefer the safety of cash after all a great deal of investing is behavioral and requires being comfortable with a certain level of risk portfolio.
Returns are important but so is being able to sleep well at night however for those saving and investing to achieve financial goals shifting a portfolio to cash may provide short-term comfort but will most likely jeopardize long-term gains.
In other words it simply doesn’t strike the right balance finding this balance while resisting the urge to react to short-term market developments is the biggest challenge all investors face. There are three reasons why this is more important than ever number one cash still generates little to no income and hinders portfolio growth. This has been true since 2008 financial crisis when interest rates fell to historic lows, nearly 12 years later rates are still at these levels with the federal funds rate back to zero.
While this is a is good for borrowers the average 30-year mortgage rate is under 3 percent it hurts savers and those who rely on their savings for income second not only are interest rates low, but inflation slowly erodes the value of cash this means that left unchecked the purchasing power of investors. Hard-earned cash might actually decline each year this has been true even though inflation at least the way it’s measured by economists has been quite low by historical standards, but even minimal inflation can have a corrosive effect.
When cash generates limited to no income acting as a drag on overall portfolios another way to describe this effect is that investors often seek safety in all the wrong places the cash balance on a bank statement may feel safe. Since it is stable, however, what matters isn’t the dollar amount of cash but what it can purchase. inflation means that the same number of dollars can purchase fewer goods and services each year, thus it takes actual portfolio growth to keep an investor’s purchasing power at par, let alone to create real wealth.
Finally and most importantly, there are better ways to manage portfolio risk and increase investor comfort, after all this is usually the reason investors seek a shift to cash in the first place. As a market timing tool to response to short-term events unfortunately this often backfires not only do markets have a history of recovering when investors least expect it. The current market environment is a great example of that, but diversification provides a better way to lower risk.
While maintaining growth while there is simplicity in holding cash having the right mix of stocks bonds and other assets can achieve a better ratio of risk and reward. Over long periods of time ultimately cash is an important part of any portfolio in moderation. Having the discipline to save enough in the first place is a laudable achievement, staying invested with the right portfolio to grow this wealth also requires discipline. This is often why investors benefit from having a trusted advisor, who can not just help to construct these portfolios.
But, act as a coach when times are difficult so what’s the bottom line while cash is tempting it does little to help investors when interest rates are as low as they are. Inflation eats away at its value and there are better options. As always staying diversified and not reacting to short-term market events is the best way to achieve financial goals.
Thanks for tuning in, I’m Phil Calandra, and you’ve been On The Retire Road.
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As an independent wealth management firm, we represent only the interests of our clients — not those of a corporation or bank. We are committed to guiding those we serve towards and through their retirement years in the smoothest, most comfortable way possible. Investment Advisory Services offered through Calandra Wealth Management, LLC a Georgia Investment Advisor.