Though there is no set rule, on how much cash an individual should have at hand at a particular time, experts say the quickest way to be poor is by holding too much cash and not investing in wealth boosting assets. The simple answer is to invest part of your financial assets in investments that are delivering a “good deal” of return.
Naturally, this means taking some risk, but it’s been proven that higher rewards in life usually go to those that are willing to take greater risks and that means that relatively safe investments such as holding up cash will only provide relatively low returns. What is clear however is that investing in cash for the long-term is not a risk-free strategy. Cash no longer delivers a ‘risk free rate’ but instead creates a ‘rate free risk’, experts say.
For risk-averse investors, the traditional way of saving has usually been bank deposits, feeling it is very safe and secure. Understandably, when you get a decent rate of interest especially if it is index-linked then this was often sufficient for their needs. However, today, this is no longer a viable solution, particularly if the investor needs to supplement their pension income from their investment income.
Financial experts say, in recent times the role of cash has changed, as it can no longer depended on to provide income or protect the real value of capital. With most investors opting to have their money generate higher returns, rather than sitting idle in a low return cash account or cashable term deposit, cash is gradually been dethroned from its former place as king.
Experts also say, cash in your sock drawer is bad for the economy and bad for you. It hurts the economy because it’s not being put to use in consumption or investment. It barely yields any profit either. It is a well known fact that cash losses value every year due to inflation, so holding on to cash is a wealth destroying activity. Hence, experts advice that while you keep a small amount of cash available at all times, ensure you do not keep more than 15 percent of your wealth in cash.
You can use this available cash to take advantage of good investing and buying opportunities, be it in specific stock market, property or alternative assets should the need arise.
However, experts say positive investments like money market fund, specific stocks, and real estate will earn you an average of 15percent yearly, while “static” cash will only return five percent profit at its best.
Clearly, it is not a good idea to ‘put all your eggs in one basket’. Therefore experts say, it is very important to have a diversified portfolio of investments that is structured to meet the objectives of the individual investor and can equally provide a balance should any particular sector of the economy suffer a set back.