Holding cash can erode overall returns

Article Excerpt

Cash has been a poor performer for the past 20 years, not even keeping pace with the low rate of inflation. Almost every asset class has done much better. But some cash can be useful when equity markets turn down—it can provide investors the opportunity to buy stocks at lower prices and it offers a buffer for investors that regularly extract money from their portfolios to cover expenses. Lastly, cash returns may rise as central bankers ramp up their fight against inflation. That will provide higher returns as interest rates move up. The dismal performance of cash Taking the returns generated by U.S. asset classes as an example—cash was the worst or second worst-performing asset class in 14 out of the past 20 years. The dismal performance of cash deposits compared to all other major asset classes is demonstrated in the table at right. Positives for cash are the low volatility and downside protection it offers. An investor who held only cash since 2002,…

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