Headlines can be so dramatic sometimes. "Cash the King Is Dead,"
announced an article by investment manager James Maltin. He pointed
out that while many used to think of cash as a safe haven,
extremely low interest rates have shattered that illusion.
But then again, when has cash
been a safe haven?
As Maltin noted, a pile of cash won't lose most of its value
overnight, as a stock investment can. But those greenbacks won't
exactly grow for you, either. Pernicious, persistent inflation will
eat away at their value, as it will for any investment. Remember,
the stock market's oft-quoted, long-term annual return of roughly
10% doesn't factor in the 3% per year that inflation generally
A lack of interest
While you can gradually grow a hefty nest egg at 7% annually, a
savings account alone won't provide you with financial security.
Even if you can find an account that'll pay you 1% in today's tough
economic environment, a 3% inflation rate means that your
purchasing power will still shrink by 2% over the year.
The economy and interest rates cycle through ups and downs over
the years; there are times when cash pays more, and interest rates
are high. In 1981, you could buy a six-month CD with an annual
interest rate topping 15%! But through most economic environments,
inflation will keep corroding your returns. That's why you need
admittedly riskier investments that provide bigger potential
payouts. If they succeed, carefully chosen stock investments can
help your money far outpace inflation.
We're not saying you should give up on greenbacks entirely. You'll
always need a certain amount of cash on hand or readily available
for daily expenses and emergencies. And if you don't have enough
cash available, you may end up having to sell your long-term
investments to get it. If those investments happen to be slumping
at the time you sell, you could suffer significant losses -- all
for lack of sufficient cash on hand.
Cash is not king now, but then again, it never should have been.
It's simply one necessary tool in a larger financial arsenal.
Longtime Fool contributor
does not own shares of any companies mentioned in this
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