Is cash risk free? Danny Cox offers up his advice and straightens the record on an old financial myth
He was serious when he said it so I didn’t laugh – “I don’t want any risk, that’s why I am in cash”. Michael is also a client.
Don’t get me wrong, I am a big fan of cash, I have some in my wallet. I also have some in the bank and some in a building society account. Cash is important for spending – you can’t spend money tied up in a property. Cash is important for emergencies – the stock market may not be having a good day when you need your money back at short notice.
But cash is not a long term investment since its spending power devalues over time. I’ll explain. Had you put £10,000 in an average cash savings account ten years ago, the interest would have increased your savings to £12,154 today. However, it would need to have grown to £13,806 to keep up with rising price inflation. Your savings have actually gone backwards. And the situation is worse had you spent the interest, your £10,000 ten years ago would now only buy £7,285 worth of goods.
On the other hand had you invested this £10,000 in a tracker fund in an ISA, your investment would have risen to £18,879 a long way ahead of inflation, meaning your investment has greater spending power and can buy more than it could ten years ago.
With cash savings, you may not run the risk of losing money but you do have the risk of inflation eroding the spending power of your money. Is cash risk free? Absolutely not. In fact there is no such thing as risk free.
Source: LIPPER, Moneyfacts average savings account £10,000, HSBC FTSE 100 tracker, RPI inflation 10 years to 31st October 2012