Opportunity lost: The true cost of cash
Today's Financial News - Posted April 27, 2009
As much as we like the security and safety of sitting on a large pile of cash, it comes with a significant cost. Remain too conservative for too long and it could cost you serious money in just a few months.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): We make countless decisions every day. Should we walk or should we drive? Should I go to the grocery store or dig through the fridge is search of semi-edible leftovers? Should I walk the dog or can he hold it until this show is over?
Most decisions are easy. Even so, they come with an opportunity cost. If we take the dog out, we might miss the best part of the show. But if we wait, we could spend the next half hour cleaning up from a bad decision.
As investors, opportunity costs are much more serious. Instead of time or effort, we are dealing with dollars and cents, sometimes lots of them. When we decided to make an investment, we also choose not to make countless other investments. After all, we have a limited portfolio.
Right now, conservative investors have a tough stack of choices in front of them. Do they keep their money in cash and reap the benefits of security? If so, they stand to miss out on significant future returns. On the other hand, they also won’t lose anything if a pig flu pandemic erupts or if the White House decides to institute a 99% capital-gains tax.
The cost of future gains
But with nothing more than a pile of cash, investors will surely miss out on the maximum profit potential if the market finally finds the positive footing it has been looking for. By the they make the decision and exchange their cash for equity, the gains could be all but gone.
The opportunity cost of staying in cash right now is huge. In fact it should be too large to stand.
Unless you plan to retire in the next year, there is no excuse to not have a proper exposure to the equities market. Depending on your age, the figure could be at 90% or it could be as low as 10%. No matter what, it should not be at zero.
Cash is certainly an important part of any portfolio, but it never plays a role in developing wealth.
Over the next five years, the nation’s economy is going to make a dramatic shift. Surely, we will go from contracting growth to a long-term surge. Inventories and production are simply too low to maintain current levels of production. GDP will expand.
Eventually inflation rates will rise as well. Once again, corporate revenues will be worthy of inspiration and investors will be bragging about their hot-stock tips. If you are stuck with a disproportionate pile of cash during that time, the long-term cost to your wealth will be significant.
We all have decisions to make. Jumping back in the equities market may be an emotionally tough one to make but it is one that absolutely must be tackled. Seeking long-term security and safety comes with a cost you cannot afford.
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