The Case Against Holding Large Cash Reserves

With the recent turmoil following the 2020 presidential election, the ongoing political tensions across the nation and the rising spread of the global pandemic, there are lots of reasons to start worrying about your financial future.

One question you shouldn’t spend much time on, however, is whether to place your hope in cash or to jump into investing in the market. Simply put, “cash is trash” and investors like billionaire Ray Dalio – the founder of investment firm Bridgewater Associates – isn’t afraid to say so. In fact, he’s gone so far as to predict that those holding on to cash today are “going to feel pretty stupid” if they miss the signs.

The truth is, you don’t need to be a billionaire to see this. The majority of investors are in agreement that dumping your cash is the way to go. One reason why is that the purchasing power of the dollar is in steady decline, and as interest rates continue to remain low, this trend will likely continue.

While Dalio doesn’t believe we’ll see an economic downturn in 2021, he does suggest that smart investors should look ahead to the next five years.

Here’s what you should pay close attention to:

The Weakening Federal Reserve: There once was a time when lowering interest rates was like pushing a button to stimulate the U.S. economy. Not anymore. If interest rates continue to fall the economy might take longer to bounce back.

Diversifying Your Portfolio Is Key: This means balancing things out to reduce your risk without reducing your returns. For now, international markets might not be a smart move. If the dollar continues to decline those emerging markets will feel the pain even worse. Invest accordingly.

Hold Some Gold: Every portfolio needs something “hard” and there’s a reason why gold has been what the central banks have held in reserve for the last thousand years., because it’s tried and true. For that reason, gold makes a great diversifier.

Cash Is Still Trash: Everyone needs to decide for themselves on whether to invest in stocks or hold cash, but interest rates should really concern you. Holding cash guarantees that the value of your money is slowly dropping due to inflation.

For example, the 10-year Treasury rate was 0.78 percent (as of Oct. 2020), but the inflation rate over the last year was 1.3 percent. This means cash investors need to wake up and realize that interest rates over the last few years are at historical lows.

The decline of the U.S. dollar is down about 10% compared to international currencies since the summer of 2020.

So, on the one hand, if you try to play it safe there’s a good chance the dollar amount in your savings account won’t decrease, but the way interest rates are going now your money won’t grow very quickly – if at all – and your purchasing power will probably only decrease over the next few years.

What if we compare the traditional bond market to other options, such as first trust deed lending? These are often the smarter way to go since they’re limited to one lender and one borrower and they are secured by one property that produces cash every month through rental revenues. Lower risks with higher, more reliable returns is never a bad idea.

Think Ahead
For investors seeking a more secure way of respond to today’s volatile economic climate, Safeguard recommends investing in assets that generate income and then reinvesting that income into further assets that also generate a healthy return.

First Deed Lending provides you with the high yield advantages of investing in rental property without the hassles of being a landlord. If you are interested in an opportunity to earn a stable income stream, even during volatile times, contact us today.