With interest rates rising, investing is paying less than actually holding and saving cash. What should one do? Hoard all the cash possible and save it? If you don’t save properly it will just get eaten away by inflation but ironically having access to liquid cash could also be a hedge against it.

What would pay me more?

Investors look for ways to make more money. Lending out their cash in the form of bonds, high yield savings accounts, or certificates of deposit. This can be extremely attractive to investors since these methods are the “lowest” risk and are currently paying the highest reward. This can cause a huge downturn in the stock market and especially in the real estate market.

Shifting gears.

If you could move your money from a risky method earning only 3-4% a year, to a more reliable guaranteed method earning 5-6% a year where would you want to put your money? Certainly not risking losing your money in the stock market when you could earn way more from a cozy savings account.

But again looking at it from the eyes of a cash heavy investor a downturn in the stock market can also be an excellent point of entry. Especially with reliable stocks being at really low points in the past year. This can be a great time to make an aggressive buy in hopes of another market upturn.

Saving cash is an investment.

I see cash as an investment decision. Holding onto your cash doesn’t mean you’re undecided where you want to put your money. It’s a defensive investment position, as it can protect you from hardship, or help you proceed on a position you’ve had your eye on for a while. Most of the time gets eaten away by inflation but in these weird times it’s more rewarding to have more of (if stored correctly).

This doesn’t mean cash will always be the winning investment decision. For example if you play it safe now and continue earning 5-6% from interest rates. What if the market goes up 10-20% in the next year. Although nothing is guaranteed and past returns don’t reflect future results. It’s always wise not to hold all your eggs in one basket.

Remember, cash is a defensive investment decision, weak against inflation. Don’t risk all your money in one asset class.

Take the risk?

No matter what you do you will be taking a risk. Play too safe and risk not earning a return. Play too risky and risk loosing it all. This is why you have to diversify your asset classes. If one crashes the others will hold you up.

Thank you for reading and I’ll see you next Sunday,
– Pablo