Good Reasons to Hold Cash

Glen_Clark

The FTSE has not fallen as much as other European indicies because of all the money printing.

Linton

Glen_Clark wrote: »

The FTSE has not fallen as much as other European indicies because of all the money printing.

Perhaps the difference is more likely to have something to do with the fears about the Euro??

Glen_Clark

Linton wrote: »

Perhaps the difference is more likely to have something to do with the fears about the Euro??

We keep hearing how bad the Euro is, but its about the same value against the pound that it was this time last year, and stronger against the pound than when it was introduced.

Eco_Miser

Linton wrote: »

Why shouldnt savers be concerned with borrowing rates? Surely, if the hidden fees on cash deposits were much lower the returns would be closer to the borrowing rates.

Or the borrowing rates would be much closer to the returns on deposits, since it's the borrowers who actually pay the fees.

missile

Glen_Clark wrote: »

We keep hearing how bad the Euro is, but its about the same value against the pound that it was this time last year, and stronger against the pound than when it was introduced.

The pound has fallen and has a looooong way to go if it is to recover pre euro value. I remember when £1 was worth €1.68 :eek:

GeorgeHowell

Linton wrote: »

Why shouldnt savers be concerned with borrowing rates? Surely, if the hidden fees on cash deposits were much lower the returns would be closer to the borrowing rates. Its all much the same as fund charges and the cost of investing in individual shares.

Returns from equities are only taxed on realised capital gains of more than £10K approx annually. As you can protect £10K per year of capital in an ISA, you need to be a pretty big investor for capital gains tax to be a major problem. Dividends are tax free for standard rate tax payers. So the tax on interest is far more onerous than that on returns from equity holdings.

The saving rates are what they are, regardless of borrowing rates, and the tax is what it is. Investors can only make decisions on net returns, regardless of how they come to be. But I repeat, that since 1999, and considering the capital risks involved (equities : theoretically unlimited; cash : zero), cash has been a better bet.

Glen_Clark

missile wrote: »

The pound has fallen and has a looooong way to go if it is to recover pre euro value. I remember when £1 was worth €1.68 :eek:

31 Dec 99 1.6081 31 Dec 00 1.5938 31 Dec 01 1.6348 31 Dec 02 1.5342 31 Dec 03 1.4197 31 Dec 04 1.4127 31 Dec 05 1.4552 31 Dec 06 1.4841 31 Dec 07 1.3619 31 Dec 08 1.0342 31 Dec 09 1.1255 31 Dec 10 1.167 (31 Dec 11 1.198)
Yep, the above is from the Bank Of England website, (except for yesterdays rate which I have taken from the FT)

So, The pound has lost a quarter of its value against the Euro since the Euro was introduced
Which makes it so remarkable to hear little englanders decrying the state of the Euro

A._Badger

Glen_Clark wrote: »

31 Dec 99 1.6081 31 Dec 00 1.5938 31 Dec 01 1.6348 31 Dec 02 1.5342 31 Dec 03 1.4197 31 Dec 04 1.4127 31 Dec 05 1.4552 31 Dec 06 1.4841 31 Dec 07 1.3619 31 Dec 08 1.0342 31 Dec 09 1.1255 31 Dec 10 1.167 (31 Dec 11 1.198)
Yep, the above is from the Bank Of England website, (except for yesterdays rate which I have taken from the FT)

So, The pound has lost a quarter of its value against the Euro since the Euro was introduced
Which makes it so remarkable to hear little englanders decrying the state of the Euro

Well, let's just wait and see, shall; we? My money's on the 'little Englanders' having the last laugh.

sabretoothtigger

10% cash is reasonable, some choose to hold like 15% gold and convert it as its needed. Always need something for bills, would be silly to have none.
To store all wealth in cash gives very bad returns now and is even possibly dangerous with cash notes being backed by governments who in turn are considered now unreliable ?

The real run on cash should start if USA is ever seriously questioned. People say this can never happen, they are just too great to fall. Maybe but I consider it an avalanche type situation, all or nothing.

To temper some of that extreme risk in anyway possible is sensible, dont hold all cash


If dollars go all currencies will suffer I would expect because billions of people will sell the dollars (vs 300m natural USA producers/owners of dollars) to buy any assets, liquid ones first like oil but even houses or food.

Those prices will rise in every currency (at least temporarily) , this could mean a kind of immediate inflation in no matter what countrys currency you hold since most rely on global markets for an even supply and demand

VT82

Some really good points raised about the value of holding cash.

Bringing it back to financial fundamentals (the Capital Asset Pricing model) also makes you realise that it has one other advantage at the moment:

If you believe the market is efficient and that transaction costs are irrelevant, in a properly diversified portfolio, higher returns are only supposed to be possible by taking more risk. So unless you have a preference in the risk-reward spectrum, you should be indifferent between receiving the risk free rate, or the risk free rate + (say) 3% for a medium risk investment, or the risk free rate + (say) 6% for a higher risk investment.

But the 'risk free' rate in this is the rate you get for investing in 'totally secure' government debt. You can either take this to be the Treasury Bill rate (currently peanuts), or, if you are planning to invest for say 5 years, the 5 year gilt yield (currently peanuts plus a smidge).

But savers don't have to settle for this. Thanks to the FSCS, and demand for retail savings, the risk free rate they can get is already the Treasury Bill rate plus 2.5-2.7% (less tax if unsheltered), or the 5 year gilt rate plus 3.6-4% (less tax) for a 5 year investment. And this is free of credit risk and free of uncertainty. As this retail savings boost is unavailable to the 'big' investors, the low interest environment, and resulting increased 'cost' of retail savings (de-linking of savings rate to the market risk-free rate), should actually make cash MORE appealing to small investors.