Which portfolio sounds “safer”: 100% cash or 100% stocks? Many investors would likely answer “all cash” for a variety of reasons; its stability, liquidity, and resistance to fluctuations in the stock market. But is that actually the case – is cash really king?
The primary appeal of cash—stability—is also related to its biggest downside for investors. Though it doesn’t lose value in the short term, cash offers little possibility of long-term growth. That may seem like a fine tradeoff when you see markets bouncing around on a day-to-day basis, but when you’re investing for a future goal—like retirement—you need your portfolio to grow.
While stocks can be volatile in the short term, their longer-term returns exceed cash by a mile, and stocks’ frequency of positive returns rise dramatically with longer holding periods. Short-term volatility is the price to pay for stocks’ longer-term returns, and remaining in cash robs your portfolio of the opportunity to increase in value.
Cash is the most liquid asset available. If you have money earmarked for a near-term expense such as a down payment on a house, then cash is probably the right call. However, if you’re a growth-oriented investor whose primary goal is retirement planning; an all cash portfolio is actually the riskier option. An all cash portfolio subjects you to the risks of inflation, jeopardizing your ability to reach your long-term investment goals. What your cash is worth today; won’t be worth near that amount when it’s time to retire.
As mentioned earlier, one of the most attractive benefits that cash offers is that is it not subject to the day-to-day gyrations of the stock market, where a portfolio’s value could fluctuate wildly. Because the value of cash is so stable, your retirement portfolio won’t lose money, right?
Wrong. Over time, cash actually loses value because of the insidious effects of inflation. Historically, inflation has averaged almost 3% a year, eating away at cash’s purchasing power over time. If you are planning to maintain a certain living standard while also accounting for expenses such as health care throughout retirement, cash as a retirement planning investment probably won’t cover your needs.
This article is not meant to completely deter you from keeping your cash assets and investments. In many cases, cash assets are the wiser choice. In our view, the question of whether an investment is “riskier” or “safer” makes sense only in light of your specific needs, goals and time horizon—because the ultimate risk in investing is failing to have enough money to meet your goal.