November 11, 2015
Investors sometimes maintain large cash deposits in their bank accounts because they may eventually need the money for a special purpose or because they are wary of market fluctuations. However, by staying on the sidelines, they substitute one type of risk for another, forgoing potential returns and allowing inflation to erode the value of their idle cash.
To maintain flexibility as they pursue their long-term goals, investors might consider strategies that provide ready access to cash while still putting their money to work in the markets.
Why shouldn’t people hold cash as a substantial portion of their total net worth?
BILL MERZ, an Investment Strategist for The Private Client Reserve: It can be a good idea to hold some “rainy day” cash in the event that a family member has a challenge like losing a job or an unexpected expense. But holding cash as a large portion of your net worth can dramatically erode your purchasing power. Even though inflation has been relatively subdued recently, an investor holding cash during the last five years would have lost nearly 9 percent of the purchasing power of those funds.
Over the last decade, your purchasing power would have declined nearly 25 percent, according to the Bureau of Labor Statistics and U.S. Bank.
KRISTINE KNIGHT, a Private Banking Managing Director for The Private Client Reserve: We invest in the market to help our clients meet their goals. We help make sure their cash is working for them and not sitting idle on the sidelines, earning little to nothing. Especially now, with the low-interest-rate environment that we continue to find ourselves in, providing clients access to liquidity without disrupting their goals is really pertinent.