Look in your wallet. You most likely have a card with a set amount of money linked to an account. Oh and you may have physical cash in it. You may think of cash as a means for purely transaction, but what if I told you that you should also look at cash as an investment.
How Cash Works As An Investment
When you have of a certain currency its value is whatever it says it is. A $1 bill is $1. A 5 pound (£5) note is £5. A 2,000 rupee (₹2,000) note is ₹2,000. Simple right? How much would either of these buy? Before anyone tries to pull out a conversion calculator no one can actually say how much any of these values would buy. Certain goods change cost all the time.
The milk you bought today is valued at about 50% more than in 1997, and that was without a pandemic. Milk increased in price by less than 2%. This is called inflation. And milk is actually doing fine inflation wise. It’s inflation rate is a little lower than the average 3.2% inflation rate.
Why is this happening? One of the simplest reasons is that cash is being printed. However, there are many other reasons for inflation, one is that demand for products or services could increase. The other main one is that the cost of production towards these products or services increase. For instance, let’s say that you are producing milk and suddenly demand increased for some odd reason. I do not know, let us pretend that a pandemic happened and people panic buy milk. Due to the lack of supply in milk the prices go up. Now let’s say that something happened that affects the production of milk like new compliance laws requiring more expensive equipment. The higher cost of production will make a higher price of the product.
Inflation is almost always constant. Money will almost always be printed, populations generally increase and demand usually increases with it, and new compliance laws are almost always developed which can increase price whether the compliance produces a net benefit or not. The key word is almost. With this in mind cash itself would sound like a terrible investment.
Assets Do Not Continually Grow
Remember all those times I said investments involve risk? That includes internal reasons such as bad company decisions and external reasons such as disasters (something we are too familiar with). It is easy to forget that the economy is not guaranteed to continually grow, in fact, it may even grow slowly.
Recently, many assets have not brought the returns that investors hoped for. In fact, many of them have dropped significantly. While cash is known to decrease pretty consistently. Decrease slowly in value assets are risky and they will face a tough battle either right now or in the near future. The economy is not doing too well right now and the stock market has rallied unexpectedly. On June 11th 2020 the S&P 500 dropped by 6%. It may be too early to say what that means, but it is a clear sign that the markets are risky.
Cash Is Good To Hold During Volatile Times
Right now having cash can and should be considered an asset so you can maintain value (mostly) to pick up new opportunities. While many assets do not appear very attractive right now there will be a time where they appear more attractive to buy.
It is not unlike buying groceries. Some items may seem too pricey at the time and you may pass them up. However, sales may put them at a price you would find more appealing. However, not unlike groceries, this will only work on what you would actually want. If mac and cheese is on sale that should not affect the buying decisions for people who do not eat gluten or lactose free (they cannot have it in the first place). Furthermore, some items on sale may not have a price for the unit you want. For instance, a sale on the most expensive stocks will still be expensive. And a pint of gelato on sale will still cost a few dollars and be more expensive than a half gallon of quality ice cream. It is just a matter of how badly you want the expensive stock or the expensive grocery item.
If you have the cash, you have the potential to invest in quality assets for a lower cost to further help you to forge your wealth.
Times right now are interesting (that is the most optimistic and accurate term to describe current times). And the economy is sure to reflect that. Either the economy will transform significantly to grow, or recede. Cash may not always be king, but it is hard to say that cash in not valuable. It is just not very interesting. But cash can be transformed into assets that are more impacting to forge your wealth.