Holding Cash in 2020 and Beyond
CONSTANTINE LYCOS, FOUNDER AND CEO AT LYCOS ASSET MANAGEMENT
According to a BNN Bloomberg report from last month based on a CIBC survey, Canadians are hoarding the most cash ever recorded in history. I have a few comments to share about this cash-hoarding phenomenon.
Pros and cons of holding cash
For certain people, that is a really good idea. For instance, if your job is on the line or your business is facing uncertainties, hoarding, or holding a lot of cash is good. But, longer-term, holding cash is a bad idea for most investors. In fact, being too conservative is one of the biggest mistakes that investors make when investing for their retirement. Being too aggressive is also a mistake, but here I focus on the cash-hoarding phenomenon.
Quantitative easing and holding cash
Interest rates are low. The central banks, including the Bank of Canada, have dropped rates to close to zero in response to the lockdowns and the economic slowdown. More importantly, banks have also engaged in massive “quantitative easing”. Quantitative easing is creating new currency to purchase financial assets and other assets to support the markets.
This is essentially devaluing the currency by means of creating more of it. So, cash, longer-term, becomes less and less valuable every year. Cash loses its purchasing power against things that we need: food commodities, metals, grains, and so on. It also affects asset prices, such as real estate and stocks.
There seem to be valid reasons Canadians are holding more cash these days. However, longer-term, holding too much cash is not a good idea. Investors choosing to hold cash may find their cash is losing its value over time, as I described above.
Be careful about the asset allocation decision. Here’s an example of a good asset mix: The Canadian Pension Plan (CPP) asset mix. We caution against holding too much cash for the longer-term. When you make this decision, please speak with your financial advisor, or talk to us. Revisit that cash, please.