Monday, 5 November 2012

My thoughts on asset classes (1: Cash)

I wanted to summarise my thoughts & experiences on the asset classes i generally invest in or actively  consider. I'll start with Cash, and work through the others in separate posts.

In years gone by, i've viewed cash as a risk free source of generating income, through interest.  I remember  having access to 5-6% savings accounts, and not really spending too much time thinking about alternative investments due to the easy return this offered.  Those days are long gone now, and my opinions have changed a lot in the last year in particular.  I now generally view cash as a backstop, or buffer to protect me against any unforseen expenses, or loss of earnings.

However, in a low interest rate environment, this buffer comes at a cost, being both an opportunity cost of not investing in products offering a better return, but of greater concern to me is the cost of inflation, and its ability to erode the value of cash over time.

Whilst i try to find what yield exists in the market for savings accounts, it is difficult to generate above inflation returns at the moment, without jeopardising the effectiveness of the safety net cash is held for. As such, my current view is to hold enough cash to conservatively cover any potential emergencies, but to not leave excess funds idle & uninvested. A priority for the coming year will be to better manage the proportion of my assets left in cash.

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