In July last year, I wrote an article titled “Is Cash Really King?”. Following increases in interest rates and volatility in investment markets, more investors were being tempted by the higher returns offered by cash. My article focused on the potential impacts of holding too much cash or jumping from investments to cash, where the value is often silently eroded by inflation over time.
Last year, interest rates available on instant access cash peaked at around 5%; however, they started the year at around 2%, so the actual returns generated were much lower than the headline rates. For example, looking at the total return on some of the highest interest-bearing and most popular instant access cash accounts, the returns for 2023 were between 3 and 3.5%.
In comparison, the inflation rate (measured by the Consumer Prices Index) in the UK for 2023 was 4%, so cash had a negative real return of 0.5 to 1%. For capital which has a shorter time horizon (one to two years), this is not a significant problem and an acceptable price to pay to benefit from the increased optionality and liquidity that cash offers.
However, an issue arises when this impact is compounded over a longer period and with significant portions of capital that do not need to be drawn upon for some time. In this scenario, stock and bond investments are your best chance of outpacing inflation and growing your real wealth despite the volatility that comes with them. There is a false security that comes with holding cash.
2023 provided a perfect example of this. By July last year, the returns on our balanced investment strategy (TM2) were roughly the same as what you would have gained from holding cash, though you would have experienced far more ups and downs with the former. It is unsurprising, therefore, that investors were tempted to shift investments to cash to attain greater perceived safety. However, fast-forward and our balanced investment strategy ended up returning 8% by the end of the year, over double the return on cash.
As I have written previously, the seduction of safety is always more dangerous than the illusion of uncertainty. Whilst cash provides short-term stability, optionality, and liquidity, it would be unwise for it to form a significant portion of any long-term investor’s portfolio who is looking to grow their real wealth.
By Jonty Brooks
General Disclosures: This article is based on current public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.
FAQs
What Is Cash Is King? "Cash is king" is a slang term reflecting the belief that money (cash) is more valuable than any other form of investment tools, such as stocks or bonds. This phrase is often used when prices in the securities market are high, and investors decide to save their cash for when prices are cheaper.
Why do they say cash is king? ›
There is a saying in the investment world: Cash is king! Without cash, purchases can't be made, debts cannot be settled, and dividends cannot be paid to shareholders. In this respect, cash is indeed king, and it always will be.
Is cash king in 2024? ›
Conclusion for Investors
Given the outlook for cash in both the near-term (2024) and longer-term (10-30 years), investors should reconsider any elevated cash balances and potentially rebalance portfolios to become more fully invested.
Do you agree that cash is king in business? ›
For businesses, cash is king because it allows them to hold on to valuable assets, sell some that may be strategic but smaller in scale, and make strategic acquisitions when the time is right.
What does money is the king mean? ›
The phrase means that having liquid funds available can be vital because of the flexibility it provides during a crisis. While cash investments -- such as a money market fund, savings account, or bank CD -- don't often yield much, having cash on hand can be invaluable in times of financial uncertainty.
Why is cash not king? ›
Whilst cash provides short-term stability, optionality, and liquidity, it would be unwise for it to form a significant portion of any long-term investor's portfolio who is looking to grow their real wealth.
What is the cash is king analogy? ›
The phrase has also come to be associated with businesses that only accept cash, rather than card payments. The concept of "cash is king" describes the importance of sufficient cash as an asset in the business for short term operations, purchases and acquisitions.
Who originally said cash is king? ›
The origin of the phrase “cash is king” is unknown, but it is said to have been popularised by Pehr G. Gyllenhammar, then CEO of Volvo, in 1988.
Will cash always be king? ›
Recent trends in investor behavior point to overwhelming interest in cash or cash-like investments. This sentiment is particularly understandable considering 2022 offered poor returns across most asset classes.
Is cash King in a depression? ›
The Great Depression lasted from 1929 until about 1939, leading to massive unemployment and bank closures worldwide. Was cash king during the great depression? Yes, it was. Those who had access to cash were able to benefit from the plummeting asset prices around the world.
Cash is king — for now: China signals it will slow transition to cashless society.
Is cash King a real game? ›
Beware of this Fraudulent App
This app is a fraud, as it does not pay out after downloading the game.
Is cash King during a recession? ›
During challenging financial times, cash and liquidity is king. Having easy access to cash during a recession can help you avoid going into serious debt.
Why do we say cash is king? ›
It was popularised after the stock market crash of 1987 by the CEO of Volvo. Overall, the saying “cash is king” highlights the importance of having cash or liquid assets available to use when needed. It emphasizes the value of financial flexibility and the ability to respond to unexpected challenges or opportunities.
Is cash is king true? ›
So, while the idea 'cash is king' encapsulates an essential business principle, it's not an absolute rule. It serves as a valuable guideline for maintaining liquidity. But, it is best balanced with other financial considerations for a well-rounded approach.
What is the cash income statement? ›
There are two Income Statements – Cash and Accrual. With some exceptions, the Cash Income Statement tracks incoming cash revenues and outgoing cash expenses. Exceptions are that the non-cash expense of depreciation is included on the cash income statement and cash payments of principal are not included.
What is this cash flow statement? ›
A cash flow statement is a financial statement that shows how cash entered and exited a company during an accounting period. Cash coming in and out of a business is referred to as cash flows, and accountants use these statements to record, track, and report these transactions.
Why is cash considered the king for a business? ›
Cash keeps your business running
Healthy cash flow essentially means that your business has enough cash to pay its bills on time. Without enough cash on hand, you risk falling behind with creditors, which can lead to delays, late fees, penalties, and damage to your credit score.
