Is cash a low risk investment?
Are stocks high risk investments?
What do you think? Do you agree with the statements above?
In this article, I’ll be exploring this topic in depth and along the way, I would like to offer a fresh perspective on what is of greater risk. I’ll be ending my write-up by sharing an useful tip to strike a balance between saving and investing money so that we all can build wealth sustainably and confidently in the long run.
Is Cash of Lower Risk than Stocks?
Understandably, I totally get where you are coming from.
In a glance, it seems that holding cash is a lot safer than investing in stocks. This belief stems from looking at assets (cash and stocks) based on their dollar value and how the value amount fluctuates over time. Let me explain.
For instance, if you have RM 100,000 placed in a savings account, you are safely assured that you can retrieve RM 100,000 from your savings account after 6-12 months later. But, it is not the same for stocks. You may invest RM 100,000 into a stock portfolio and by the very next minute, the value of your portfolio would change in dollar value. After 6-12 months later, the value could lower, higher or equal to RM 100,000. In short, there is no certainty that you could retrieve your RM 100,000 back from investing it into stocks.
So, because of the fluctuation in dollar amount, cash is viewed to be safer than stocks. This has caused many to put their monies into fixed deposits and refrain from investing them.
Here’s my take on this.
I believe the viewpoint of ‘cash being a lower risk investment than stocks’ is not completely true. I can somewhat agree to it only if we view it in the short term. Next, I’ll share why I think holding onto cash for the long-term is risky and why I think it is possible for stocks to be a lower risk investment than cash.
Can Stocks Be of Lower Risks than Cash?
Let’s take a 10-year perspective to this.
For instance, a saver put his RM 100,000 into his savings account ten years ago. Today, he can retrieve a little more than RM 100,000 due to interest. Hence, his dollar amount is almost the same as ten years ago. But, here’s a question. What can he buy with it? Do you agree that the value of his RM 100,000 today would be a lot lesser than the value of his RM 100,000 ten years ago?
Simply put, cash hoarding is a guaranteed way of having your wealth eroded for the long-term as cash depreciates in purchasing power over time.
Today, the speed of our cash rotting in value is faster than ever before with cuts in Overnight Policy Rate (OPR). This means the cost of money is cheaper, savers are getting lesser for their savings and borrowers who know how to use debt to get richer will emerge victorious in this time of uncertainty. Debt is now cash.
The situation is different if you invest in stocks.
When I use the word ‘Invest’, I’m referring to buying, holding and accumulation of good stocks for the long-term. It is not stock trading, which is very different. I define a good stock as one that has a track record of growing their assets, sales, profits, cash flows, and dividend payouts for the long-term (10 years).
For instance, an investor may purchase RM 100,000 worth of Public Bank Bhd’s shares ten years ago. Over time, the bank had expanded its customer bases, its loan portfolio, its product ranges, assets, profits and dividend payments. Today, the investor would have collected RM 48,000 in dividends from Public Bank and his investment in the bank has grown to RM 153,000 in market value. Hence, in essence, he doubled his wealth in ten years.
Thus, in the long-term, it is better to convert cash into income-producing assets where their market value will be revised upwards as they earn more income for their owners over time as compared to holding cash by itself. This is why I think stocks (the good ones with a track record of growth) are lower risk investments as compared to cash for the long-term.
Conclusion: Striking a Balance Between Savings and Investing
To recap, I would say:
In the short-term, cash is of lower risk than stocks as a store of wealth.
In the long-term, cash is of higher risk than stocks as a store of wealth.
As such, I believe all of us need both: Savings and Investing.
Their purposes are different. For instance, savings is for a rainy day and you will find it handy, especially in times of financial need. It could be used to fund your living expenses if you received a pay cut or were retrenched or your business is slow. Also, it can be used to fund your immediate needs such as your wedding, a purchase of your new home or even to pursue a career switch or a brand new business venture. So, savings is about liquidity, not for wealth building.
Meanwhile, investing is about building our wealth in the long-term. As I write, I find investing a skill that is necessary for us to learn and master for cash itself is perishable in terms of its purchasing power and thus, is a poor store of wealth for the long term. So, where do I start learning about investing?
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