The unexpected risk of holding cash
🔸 Plus: The real economics of being a Dallas Cowboy Cheerleader 🔸 Etsy is bannning robots 🔸 Most crypto owners live in Asia 🔸
Your 2-minute guide to demystifying money and making you richer
The markets, year-to-date
S&P 500: 5,667.20 ⬆️ 17.83%
FTSE 100: 8,187.46 ⬆️ 6.86%
Bitcoin: $64,905.40 ⬆️ 46.83%
GBP to USD: $1.2987 ⬆️ 2.05%
GBP to EUR: €1.1879 ⬆️ 3.03%
Cash, risk, and volatility
I was talking with a Moneyin2 reader recently about her savings. She lives paycheck-to-paycheck but had managed to save a few thousand pounds from side gigs.
How do you save it? I asked.
“In cash”, she replied.
Are you earning interest on your cash? I asked.
“No,” she said. “I keep it in cash.” She meant “cash” literally: She keeps several thousands of pounds hidden in a metal box in her house.
This is the very worst way to keep your savings
You can lose the box. Your house could catch fire. You might get robbed. It just isn’t safe.
This is why banks exist! And, of course, if you use a high-rate savings account then your cash will earn money while it sits there in safety.
She knew all this, of course. She reads Moneyin2. So I asked her why she was doing this — when she knew that her cash might be gaining interest or, if invested in stocks, the higher gains that come with owning equities.
Turns out she has an extreme aversion to risk. As someone who has never earned a large salary, she cannot bear the idea of losing any of her savings — to the point that she even regards giving it to strangers at a bank as a risk not worth taking.
We have all been there: There are times in your life when every penny counts, and if you can scratch together a little nest egg the idea of losing any of it — or risking any of it — seems unreasonable.
As far as my friend was concerned, the stock market is a casino that might steal her savings.
She is right, in a sense. Stocks do occasionally crash. Downward market corrections of 20% or more are not uncommon.
At Moneyin2 we have made the argument that despite this, you should put your money in a broad stock index fund, such as an ETF that tracks the S&P 500, and leave it there for years while it rides the ups and downs. History shows that investors who do this come out ahead, on average by 6-10% per year.
It is obviously difficult to say to someone who has taken years to save a few thousand pounds that they should bet on a market that will, almost certainly, wipe 20% off its value very suddenly at some point in the future.
Volatility is not always bad
However, a big part of the problem is that we’re using the word “risk” when we should be using the word “volatility”.
Because, as you can see from this chart of the S&P 500’s historic performance, it generally follows a predictable, years-long trend: It. Goes. Up.
The arrows on the chart show that if you first invested five years ago but were unlucky, and were forced to pull your money out during a market downturn, there was only one point where you would have lost money: the first arrow on the left, within the first year of your investment:
If you cashed out any time after the first year, even on the dips, you’d have made money.
If you look at the smaller time-periods you’ll see the market goes up and down a lot. Sometimes the declines can be brutal. But anyone who leaves their money in a broad index of global equities like the S&P will almost certainly come out ahead — as long as they let it ride out the volatility over the years.
In other words, stocks aren’t so much “risky” as they are “volatile” — and they are not the same things.
The guaranteed risk of cash
To turn this on its head: keeping your savings in cash is definitely risky. In addition to the risk of physical loss, holding cash under a mattress loses you money two ways:
You don’t earn interest, which is lost money.
The value of cash is constantly nibbled away by inflation, which is more lost money.
That’s a LOT of risk. The downside is guaranteed.
But what if you kept the cash in a savings account paying 5%? That’s a guaranteed return with no risk and no volatility, surely? Here’s what would have happened over the last five years:
A stake in the S&P 500 grew 87%.
A 5% savings account grew by 28.34% in total.
The cash saver has lost about 59 percentage points of gains compared to the person investing passively in the market. That loss is a “risk” that is a poorly understood.
Risk is sometimes mere volatility
Often, when people talk about investment “risk” they’re really talking about “volatility”. (Sometimes they do this for legal reasons.) Cash itself carries downside risk — but for someone reason no one ever uses the word “risk” when discussing cash, because cash is not volatile.
The other risk of cash is to your future self. You know there are bigger gains to be made by investing in equities rather than keeping cash.
Will your future self — who is entirely dependent on the good sense of your current self — thank you for avoiding the temporary volatility of stocks in favour of the definite risks of cash?
Moneyin2 in Partnership with Quartz
Sign up for the free Daily Brief newsletter from our friends at Quartz for insight on the economic trends and policies guiding the global economy. Over half a million professionals come to Quartz to see where business, tech and culture intersect. For fresh analysis on the business news across every sector, we read the Quartz Daily Brief.
And for dessert …
A deep dive into the real economics of the Dallas Cowboys Cheerleaders. “A veritable checklist of the excuses people make for lower wages in women-led professions,” according to Money With Katie.
Etsy is banning robots. The artisan marketplace is cracking down on mass-produced AI nonsense. A human touch will be required from now on, the company says.
A hedge fund sued one of its own portfolio managers claiming he orchestrated a $100 million Ponzi scheme. The manager allegedly invested in a company selling filtered water machines, without telling anyone that he was an investor in the company and that the machines did not exist.
Asia owns more crypto than anyone else. There are 326 million crypto owners in Asia. Only 72 million in the US, 55 million in South America, and 49 million in Europe.
How many private corporate jet flights are necessary for business reasons? Relatively few. 40% of their flights are empty as pilots move them to the locations where they’re needed. As for the rest, a suspicious number of corporate titans are doing their “urgent” business in Ibiza, Tenerife and Corfu.
The Moneyin2 Guide to Wealth
The Moneyin2 Guide to Wealth will get you the biggest return on your savings by maximising cash matches from your employer, free cash from the government, and shielding your investment gains from tax. It takes you step-by-step through the world of pensions, SIPPs, ISAs and ETFs — all in plain English.
More from Moneyin2:
Do you want Moneyin2 to recommend your Substack?
Get in touch at contact@moneyin2.com!
We want to hear from you!
What money issues do you want us to tackle in this newsletter? Let us know at contact@moneyin2.com.
Follow us on social media
Facebook, TikTok, Instagram, Twitter, and Threads.
Partner with us!
If you want to sponsor Moneyin2 get in contact here.
 | A guest post by
|