Cash Is King? Since When?

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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 ever 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 devours.

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.

Cash's role
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 Selena Maranjian does not own shares of any companies mentioned in this article. Try any of our investing newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is Fools writing for Fools .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance

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