10 Mar 2015, 9:50pm
debt personal finance
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  • The cash conundrum

    Cash is a terrible ‘investment’. As far as I’m concerned it isn’t one -though there appears to be one period over which it outperformed the FTSE100 TR. If you were dumb enough to sit on a shedload of cash and invest it all in one go in December 1999 then you’d have been better keeping it as cash for 15 years. Well, yeah, but who saves for a pension in cash over half their working lifetime, chucks it all on red and then goes home? If you are such a soul, you deserved all you get. Most of us save for a pension as we earn, albeit at varying rates through our working lives. In general, if you suddenly have a whacking great lump like that you haven’t earned it, so tough luck if you came into an inheritance in late 1999 and blew it all into the dotcom bust. Easy come, easy go…

    £100, waiting to be turned into booze, Harry Wraggs and Sky TV vouchers

    £100 will remain £100 but won’t be worth £100 as time goes by

    In theory private investors can give up part of their lives to moving cash about between the latest best-buy accounts for years. You’ll be working hard for a lousy return, but at least no volatility.

    Cash is not an investment. It is a mediocre store of value but a great medium of exchange

    At the moment, interest rates are low. There is a lot of grousing about this, which I don’t have a huge amount of fellow-feeling for. I have never regarded cash as an investment. It’s a proxy for a claim on work in the future, and medium of exchange. It is crystallised power. It is symbolism, it is not procreative in itself. It still surprises me when people think they can get a real return on cash.

    The stories your parents told you about saving cash and it growing were largely a lie. They were right that if you add £1 a week you end up with £52 after a year, it grows as you add to it, rather than in and of itself. You still have to work for that. If you want it to grow in value by itself, well, that, indeed, is why you invest. Indeed, the story of the talents I was taught at school is a much more accurate portrayal. If you want your wealth to grow you have to put it to work in doing something. Merely digging it into the ground, sticking it under the mattress or putting it into a bank account isn’t good enough. You can put it to work in the stock market, you can put it to work in a BTL house portfolio, you can put it to work in building a business or buying productive capacity, be that training of yourself or machinery and plant to make better widgets. All of these need skill and judgement calls, and involve some element of risk because what you think should happen doesn’t always happen. There be dragons.

    If you want relative security of cash, it ain’t gonna grow – you will largely be running down your capital in retirement. There’s nothing wrong in that. It is what I am doing at the moment. It is what an annuity does. Everybody panics when they think of not getting an income. They want the security that the number at the bottom doesn’t change without their say-so. Clearly they’ve never read Lady Windermere’s Fan, in which Oscar Wilde summarises the problems of conflating price and value,

    a man who knows the price of everything and the value of nothing

    In doing that they miss that the value of that number slowly degrades with time, but that’s a different story.

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