The "erosion" of cash - a myth?

zelda2007 · 9 May 2007 at 3:32PM

I wonder if someone can help put this straight. I've noticed a few posts saying that investing money in cash (i.e. bank accounts) is a bad long-term idea and will actually "erode" it's value. For example Dunstohh (not singling you out, you just happened to have written the last post I saw on this issue) pretty much said that long-term investments of cash are a big no-no.
Maybe I am wrong here, but this just isn't true. If carefully and gradually saved in carefully selected accounts, cash will not erode in value and in fact can (very small) increase in value over time. For example, transferring the money into ISA's and accounts that always (after tax) pay interest higher than inflation. Now obviously if you acquired a £500,000 lump sum all at once, if all invested in cash it would definitely be a bad idea. But gradually saving a few thousand pounds a year and building up a nest-egg in high-interest account(s) will not erode the value. I am aware investing in the stock market is usually better long-term but feel that a financial advisor effectively telling people to "rule out" cash, is mis-leading and not correct.

Or maybe I'm just getting it wrong???

chesky369 · 9 May 2007 at 3:46PM

I think they're setting any interest gain against the RPI which I think at the moment is running at 4.8%. The presumption is that this is the truest idea of the cost of living which, if you're gaining say 4.6% net interest means you're losing out.

Browntrout_2 · 9 May 2007 at 3:59PM

£10,000 on deposit in 1986 payed out interest income £1,580 in the 1st year, how do like them apples!

If you spent the income every year you'd still have £10,000 on deposit but your income would be £381 this year.

Over the same 20 years inflation reduced the spending power of £1,580 to £799 - presume basket of goods scenario, approx 50% unless of course you're only buying computers or TVs.

Meanwhile £10,000 invested in Invesco Perpetual Income fund would now be yeilding £2,481 per annum, although lower in the early years, plus your capital would have grown seven fold or basically through the roof.

If you're relying on cash for income over the long term you'd better start with a lot.

MABLE · 9 May 2007 at 4:47PM

I have always found that bad investments erode cash quicker than putting the money into savings accounts.

dunstonh · 9 May 2007 at 5:47PM

Maybe I am wrong here, but this just isn't true. If carefully and gradually saved in carefully selected accounts, cash will not erode in value and in fact can (very small) increase in value over time.

Historically cash doesnt keep up with inflation. As mentioned, you need 4.8% currently to beat inflation. That is possible just at this time if you are a non taxpayer or utilise regular savings plans.

However, the issue you would have seen it on is linked to people requiring an income and Browntrout answers that. I will just add that £100k would be worth around £70k if you are lucky in 10 years time and £49k in 20 years time. That £5000 interest would be worth £3500 in 10 years time and £2450 in 20 years. So, not only is the income going down in real terms but the capital value is as well.

I am aware investing in the stock market is usually better long-term but feel that a financial advisor effectively telling people to "rule out" cash, is mis-leading and not correct.

Everyone should have a cash element to their portfolio but you are taking the posts out of context. You will find the common element in the other threads are those requiring an income from their savings.

baby_boomer · 9 May 2007 at 5:51PM

Browntrout wrote: »

Meanwhile £10,000 invested in Invesco Perpetual Income fund would now be yeilding £2,481 per annum

I agree with your general sentiment, but talk about cherry picking your example

.

zelda2007 · 9 May 2007 at 7:46PM

dunstonh wrote: »

Historically cash doesnt keep up with inflation. As mentioned, you need 4.8% currently to beat inflation. That is possible just at this time if you are a non taxpayer or utilise regular savings plans.

However, the issue you would have seen it on is linked to people requiring an income and Browntrout answers that. I will just add that £100k would be worth around £70k if you are lucky in 10 years time and £49k in 20 years time. That £5000 interest would be worth £3500 in 10 years time and £2450 in 20 years. So, not only is the income going down in real terms but the capital value is as well.

Sorry but I disagree.

First of all - yes, inflation is 4.8%. I currently have most of my money in two accounts which pay interest above this figure, the easiest example my ISA which for several years I have ensured I am using one with a rate above inflation. If I continue to ensure my ISA rate remains above inflation for, say, the next 20 years, how will the capital go down in value? It won't. And these figures, where have you plucked them from? It's nonsense. It's like saying "if you invest in a stock market fund your money will be worth £XX in 10 years time". There are accounts which pay 0.1% interest, others pay 3%, others pay 5%, others pay 6.5%, and so on, how can you possibly give figures? If you're just using an average, that too is invalid because if I am ensuring my interest rate remains above inflation, my capital will never lose value.

I agree that investments for income, will diminish over time if in cash. However, simply keeping your capital in cash bank accounts will NOT diminsh in value if you (like me) make sure you're staying ahead of inflation.

I'm not anti-investment - I have had significant investments in a variety of funds but, I don't like seeing people misled by being told that cash will erode in value. When, in reality, if they are careful about where they put it, it won't.

zelda2007 · 9 May 2007 at 7:48PM

To again make it clear, I'm not talking about investments where the income is drawn. I'm talking about simply having your cash in a carefully selected account.

amcluesent · 9 May 2007 at 7:49PM

>that a financial advisor effectively telling people to "rule out" cash, is mis-leading<

The US and Britain (so a lesser extent) have all been running their mint's printing presses non-stop for years to pump liquidity into the markets, which is why we've seen so many asset bubbles, esp. in housing. Cash is trash.

So for someone employable in their twenties, cash can be an emergency fund equal to 3 months salary. For someone of pensionable age, the volatility of equity investment isn't such a good idea.

That said, in the long run we are all dead!

cheerfulcat · 9 May 2007 at 8:02PM

zelda2007 wrote: »

I agree that investments for income, will diminish over time if in cash. However, simply keeping your capital in cash bank accounts will NOT diminsh in value if you (like me) make sure you're staying ahead of inflation.

I'm not anti-investment - I have had significant investments in a variety of funds but, I don't like seeing people misled by being told that cash will erode in value. When, in reality, if they are careful about where they put it, it won't.

The trouble is that any sort of headline inflation rate is pretty arbitrary. The relevant rate of inflation is actually a personal one; anyone who drinks alcohol, smokes, owns a car or a house, pays income tax, buys foreign goods or any combination of these will be subject to a different inflation rate to someone who does/has none of those. Elderly people and those who are housebound for whatever reason will be more exposed to inflation in energy prices than someone who works in an office all day. The chances of beating those particular rates of inflation are pretty slim with cash.

dunstonh · 9 May 2007 at 8:02PM

To again make it clear, I'm not talking about investments where the income is drawn. I'm talking about simply having your cash in a carefully selected account.

So, why did you make reference to my posts which have been made in response to people requiring income?

The issue of inflation is at it's worst when it comes to those relying on their savings to provide an income. That is the time you have seen it mentioned apart from when telling people to make sure the rate they look for on their savings is above RPI.

And these figures, where have you plucked them from? It's nonsense

How can it be nonsense? Are you saying that there will be no inflation then? It is quite possible and probable that my figures will be inaccurate. I cant tell you what inflation will be in future. Indeed, the 70% of value retained over 10 years is better than the current inflation rate which would see a retained value of around 64.2%.

The "erosion" of cash - a myth?

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