After a year like 2018, the question arises, is cash possibly king?
While hindsight is a wonderful thing, looking forward is tremendously difficult. As we look back at 2018, we will find that cash will have been a great asset to own.Recently, I found an online bank that will pay 2% if you use their online savings account. 2% would have outperformed nearly every other asset class for the calendar year, however, there is still a problem with cash. The problem with cash is that it does not outperform inflation and even 2018 could not escape inflation’s clutch. In the financial world, we sometimes say that owning too much cash is the best way to “go broke safely”.
“How?” you ask. I’ll explain.Let's pretend that on January 1, 2018, you had $100 and you placed that $100 into that 2% online savings account.On December 31st, your savings account should be worth $102. Congratulations, you made money! The same investment in the S&P 500 would be worth $95.25 assuming you reinvested dividends.
However, according to the Bureau of Labor Statistics and through the month of November 2018, the All Items Index (one of the indexes we use to measure inflation) was up 2.2% (which was down from the previous month due to the rapid decline of gas prices). This means that the cost of the items we buy would now cost $102.20, but our savings account is only worth $102. We have not even made enough money to buy our everyday ‘stuff’.
“I made money” you will say and yes, I agree, in 2018, you did. Now, let's add another year onto our calculations.In financial planning, it is very dangerous to only look at a single year because when we think about our finances, we plan for the long-term.
For the two-year period including all of 2017 and 2018, your bank account would be worth $104.04, the cost of that ‘stuff’ we buy is $104.43, and the money that was in the S&P 500 is now worth $113.10. While there are always very important reasons to hold cash, I would hardly call cash the king, maybe the royal doctor, but certainly not king.
Disclosure: Investing involves risk including the potential loss of principal