What if there was a risk hiding in plain sight in your portfolio with absolutely no upside or reward?
We’re talking about the risk of keeping a large portion of your long-term savings in cash (or in cash equivalents like GICs or high-interest savings accounts).
True, cash is not exposed to the volatility of equity markets. But cash currently earns a low rate of return, and its value and purchasing power decline over time, when measured against the steadily rising cost of goods and services. As long as inflation exists, then your cash is virtually guaranteed to gradually lose value.
There are legitimate reasons to hold cash, particularly if you plan to use the funds in the near future. However, if you have a longer investing time horizon, you should put your cash to work and assume some calculated risk, in order to ensure those dollars will meet your future needs.
Just a small leak?
In the 1970s and 80s, annual inflation in Canada was much higher than it is now, and investors were more aware of the everyday impact of inflation on their portfolios.
In recent decades, however, the Bank of Canada has successfully kept Canada’s inflation rate relatively low, between one and three per cent. That said, a slow drip from a tiny hole in a bucket of water can empty the bucket over time.
That’s similar to the “slow drip” impact of inflation on your cash. Over long periods, it significantly erodes the purchasing power of your savings.
For example, over thirty years (a typical retirement planning timeframe), the purchasing power of $100,000 will gradually fall to just $55,207 if inflation averages 2%, or to as little as $30,882 if inflation climbs back up to 4%.
Understand this: holding too much cash in an effort to protect your funds from risk could dramatically reduce their future value.
Avoid hidden risk with a deliberate strategy
In practical terms, inflation creates a drag on investment growth, so, in order to increase your wealth, your investments must earn more than the rate of inflation. This is where other types of investments like stocks and bonds play a role in your portfolio.
It may be you’re uncertain how to invest in stocks and bonds. And you may be worried about market volatility.
I can help, by working with you to create a personalized investment plan, one that evaluates all your assets and considers your personal comfort level with risk. You can then move your cash “off the sidelines” and into an appropriate mix of professionally managed assets that respects your comfort level for risk and preserves your future spending power.
Book an appointment with me soon to review your assets and consider how well they match your current and future financial goals. Call: 250-787-0365
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