Holding cash can hurt your returns

Article Excerpt

Cash can be a useful asset in a balanced portfolio, although the very low-interest rates of the last decade greatly diminished the attractiveness of that strategy. Nevertheless, many investors will hold a portion of their portfolios in cash to cover emergency expenses or to take advantage of market opportunities as they arise. Cash has provided reasonable returns over the long term. Not only does it offer a return somewhat higher than inflation, but it also had very low volatility, which has been useful in helping to stabilize portfolio returns in volatile times. But times have changed (see table below). Cash delivered mediocre returns over the past 10 years, courtesy of the extremely low interest rates dictated by the major central banks in the developed world. Also noteworthy from the table is that cash returns over the past 10 years were below the rate of inflation. That implies the purchasing power of cash has declined over the past decade. Interest rates have increased in…

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