MARKETS & INVESTING
IS CASH KING AGAIN ?
Priscilla Cheung Investment Specialist Brooks Macdonald
Reproduced with permission from Brooks Macdonald .
Cash savers are currently enjoying the highest returns in nearly two decades , with some popular savings accounts offering fixed-term deposit rates over 5 % per annum . After a prolonged period of virtually zero return on cash , rates today are multiple times higher compared to previous years , and investors are naturally keen to put more into cash than they have done previously . So , are investors right to prioritise cash ? To answer this question , we examine the role of cash in the context of inflation , investment horizon and opportunity cost of reinvestment . Despite the current attractiveness of cash deposit rates , cash may not be the best place to be for long-term investors .
Cash is not inflation-proof Cash offers certainty only in its nominal value but not its real value , which is measured by the resilience of its purchasing power over time . Inflation erodes the purchasing power of any asset . While cash may retain its real value to some extent during periods of low inflation , its purchasing power rapidly diminishes during times of high inflation . In fact , in the past two decades , there were only three isolated years where cash managed to outperform inflation and retain its purchasing power . Even during the era of subdued inflation that preceded the Covid pandemic , deposit rates languished at levels even lower . Despite the recent surge in cash rates , they still fall short of the prevailing higher inflation rates . Consequently , relying solely on cash rates often proves inadequate in terms of providing comprehensive real value protection .
A diversified portfolio could be a better option for long-term investors It is important to examine the case for cash in comparison to other investment instruments such as equities and bonds . For investors with long-term goals , a diversified 60 % equities and 40 % bonds portfolio can hold greater potential for generating real returns . If we examine the excess returns of cash versus an equities and bonds portfolio across varying time horizons , we see that over the past 3 , 5 , 10 and 20 years , cash savings have delivered negative real returns , thereby diminishing the purchasing power of depositors . While cash managed to retain a level of real value over a 50-year period , which will incorporate many different economic cycles , it is still lower than the returns generated by the equities and bonds portfolio . By contrast , the equities and bonds portfolio has consistently delivered returns that outpaced inflation across timeframes of 5 to 50 years , regardless of the prevailing macroeconomic conditions .
Real return across different timeframes : Equity and bond portfolio outperforms cash
10 %
Cash Equity and bond portfolio
8 %
6 %
4 %
2 %
0 %
-2%
-4%
-6 % Last 3 years Last 5 years Last 10 years Last 20 years Last 50 years
Note : Real return is the annualised percentage return after adjusting for inflation . The equity and bond portfolio shown above is composed of 60 % large cap equities and 40 % intermediate term Government bonds . Source : Morningstar Direct , accessed through CFA Institute . Data to December 2022 . Past performance is not a guide to future performance and no investment is guaranteed . You may get back less than you originally invested .
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