What has cash got to do with investing? Quite a lot, as it happens. Many investment portfolios, including Wealthify Plans, typically hold a cash reserve. Here’s why…
- In investing terms, cash means physical money, like the stuff in your pocket. It’s considered one of the four main types of asset (another word for investment) alongside stocks, bonds and property. You’ll find a small reserve of cash in most well-balanced investment portfolios – including Wealthify Plans. Your cash reserve is effectively a piggy bank that your investment manager can dip into quickly when they need to buy your investments.
- Cash is generally considered to be the least risky of all asset types because compared to others like stocks, bonds, or even investing in property, it’s the one that is least likely to lose value.
- …But it’s not as safe as you might think! Cash is susceptible to losing value through rising inflation, which effectively reduces cash’s value by making everything else more expensive. This effect is particularly acute when interest rates fall below the rate of inflation because then your cash is losing value faster than it can earn interest. Likewise, fluctuations in the value of a currency can affect cash’s buying power.
- Cash is known as a ‘liquid’ asset. In the finance world, a liquid asset is any type of investment that can be easily and quickly turned into cash to be spent on other investments. In contrast, physical property, like your house, is one of the least liquid types of investment, because it can take a long time to turn into cash to be used somewhere else.
- Cash is an essential ingredient of any good portfolio. It helps reduce risk by giving investors the ability to quickly buy stocks and other investments at a discount when markets dip. But there are other things to consider when the market drops. Cash can act a bit like an investor’s protective force-field; by converting investments into cash at just the right time, so you can protect your portfolio from the worst dips and then when everything’s cheap, you can pick up some bargains.
Investment can go down in value and you could receive back less than invested.