Cash is Trash?

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A reader asks:

how about the view that your investments are no good if they do not keep up with the rate of inflation…I disagree with that concept totally…the risk is not always worth the “possible” return. Why not just save more…yes, your dollar will not be worth as much in 20 years but why should it be and why do people assume the risk to get it there when they have seen so many have failed…that it might be better to accept less risk, make less money and possibly have “more” money in 20 years than you would if you took the risk???

I see her point, but don’t know if I entirely agree.  Certainly, you are better off getting 1.5% on T-Bills than losing 30% on stocks.  But if inflation is 6%, you are still losing ground.  In the late 70’s, early 80’s, inflation was in the teens.  There were investments that beat that, or at least maintained ground, but if you were in pure cash, with no interest, your net worth was heading down.  There is no difference in losing half your value to inflation over three years and throwing half your money in the toilet and flushing.

Put another way, in 1974 an apartment cost $150/month, a loaf of bread cost 29 cents, and a pair of jeans could be had for ten bucks.  Those exact same items cost twice as much a half decade later.  Since the items are the exact same, it must be your money that dwindled.

But I do agree that investing in money market or government bills may be a wise choice over the long term.  I’ve never really been satisfied with the assurance that over time the stock market does better than anything else.  After all, if a company you are invested in goes bankrupt, it really doesn’t matter what the Dow did that year – you lost everything.

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One Response to “Cash is Trash?”

  1. mortar Says:

    I agree with your last paragraph and have always felt the return in the stock market is not what they claim it to be.
    Financial wizards by the dozens are now recognizing that even the long-term may not be enough to contend in this market….initially, the long-term was five years, then 10, and now….what?….15? And even so, how long will it take for many to make back the money they have lost.

    The old mantra, “never invest money in the stock market you cannot afford to lose,” seemed to evaporate with the phaseout of company pension plans and the establishment of the 401k. It has been replaced with phrases such as….the market ALWAYS comes back (just maybe not in your lifetime), or you have to invest (play) in the stock market in order to keep up with inflation. I remember how diligent so many elderly, who survived the great depression, were with their money….seems like we need to get back to this frame of mind…respect for the money we have and how it can work for us responsibly…it is not something to play with…yes, we might get rich from doing that…but we might also get very, very poor.

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