Is Cash The Safest Type Of Investment?
Is cash the safest type of investment will depend on several factors. There is no one answer. This is because ‘safe’ is a subjective term. It will mean different things to different people. It may even mean different things to the same people in different circumstances.
Is Cash The Safest Type of Investment?
It is a no brainer, right? Cash held in the bank does not go up and down in value. If you put $1,000 in the bank today, you know you can withdraw the same amount tomorrow. It is pretty safe. Well, that depends on what you intend to do with it. Here are three risks:
Negative Interest Rates
Leaving cash in a bank account in some countries will cost you money at the moment due to negative interest rates. This is the opposite of the bank paying you interest to hold the money with them.
Whilst cash is useful to have in the short term. It is not a good long term investment. Historically, cash has underperformed all other asset classes over the long term.
Inflation, the rise in the cost of living, eats into the purchasing power of the cash you have in your pocket or non-interest bearing bank account. Over the short term, this is hardly noticeable. But over the long term, due to compounding, this is a serious threat. For example, if inflation runs at 3% a year for 20 years, money loses almost half of its value over the 20 years.
Depending on what you want to achieve with your cash, it may not be the best investment. The above is not an exhaustive list of the risks associated with cash. They are just a few examples to demonstrate the less obvious risks associated with this type of investment. For more information on expat investing click here.
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