In an age of low-interest rates paid by banks and unpredictable economic events, keeping your money parked in a bank account may not be the smartest strategy for wealth preservation and growth. The phrase “Cash is King” has lost some validity, giving way to more robust and dynamic financial planning. The key to sustainable financial health often lies not in the bank vault but in a diversified portfolio of assets that offer better potential returns and safety than traditional cash savings.
In this article, we dive into six such assets that have historically proven to outshine cash savings regarding safety and return on investment. From the tangible security of gold and real estate to the modern digital asset of Bitcoin, we’ll explore why and how these assets can play a pivotal role in your financial journey. If you want ideas on managing excess cash to preserve its spending power or see it appreciate, read on for places to consider putting cash instead of a bank account.
What are better assets than cash?
- S&P 500 Index
- Real Estate
- Treasury Inflation-Protected Securities (TIPS)
Holding gold as an asset has been considered a safe haven and a hedge against inflation for the past 50 years, so it’s often seen as better than holding cash. Here are some reasons:
- Inflation Hedge: Gold is widely regarded as a hedge against inflation. When the real returns on currencies and other assets are negative, gold retains its value because it is a physical asset that can’t be created at will like a fiat currency. As the cost of living increases, gold also tends to increase, so gold owners are protected from the eroding effects of inflation.
- Currency Hedge: Gold can also act as a hedge against currency risk. If the value of a particular currency drops significantly, it can lead to a higher gold price in that currency. This is particularly useful for people living in countries with unstable or hyperinflationary economies.
- Safe Haven Asset: Investors often flock to gold as a haven in economic or geopolitical turmoil. Gold tends to hold its value better than other types of assets in times of crisis.
- Portfolio Diversification: Gold often performs differently than other financial assets, such as stocks and bonds. This makes it a good tool for diversification if you already own stocks.
- Universal Acceptance: Gold is universally accepted for its value and has been for thousands of years. This means that even if a fiat currency’s value decreases, gold’s value will still be recognized globally in financial markets.
- Limited Supply: Unlike fiat currencies, where governments can print unlimited amounts, the supply of gold is limited. This scarcity is part of what maintains gold’s value.
While gold has these advantages, it doesn’t come without risks. The price of gold can be volatile in the short term, it doesn’t provide income like dividends or interest, and costs can be associated with its storage and insurance. There are also gold exchange-traded funds that can be bought. As with any investment, it’s essential to consider these factors carefully.
2. S&P 500 Index
Holding an investment in the S&P 500 Index is often seen as better than holding cash due to the potential for higher returns and the power of compounding. Here’s why:
- Historically Higher Returns: Over the long term, the S&P 500 Index, representing a broad diversification of the US stock market, has provided significantly higher returns than the interest earned from holding cash in a traditional savings account. From its inception, the S&P 500 has had an average annual return of approximately 10% before inflation, including capital gains and dividends.
- Passive Investment Strategy: Investing in an S&P 500 Index fund is a type of passive investing, meaning it requires little time or knowledge about individual companies. This makes it a more straightforward investment strategy for individuals who do not have the time or inclination to manage their investments actively.
- Diversification: By holding the S&P 500, you’re investing in 500 of the largest companies in the US across a wide array of industries. This diversification reduces the risk associated with individual companies or sectors performing poorly.
- Dividends: Many companies included in the S&P 500 index pay dividends, which can provide an income stream to investors and can be reinvested to grow the investment further.
- Capital Appreciation: Over the long term, the value of the S&P 500 has consistently appreciated, providing potential for significant capital gains.
- Inflation Hedge: Investing in equities can help protect purchasing power against inflation. Over time, as businesses increase prices, their profits tend to rise, boosting their stock prices.
- Power of Compounding: The combination of reinvesting dividends and the long-term trend of upward growth means that your investment can grow exponentially over time due to the power of compounding.
Like all investments, investing in the S&P 500 Index isn’t without risk. The value of the index can go down, and investors can lose money, especially in the short term. It’s also worth noting that while the index has historically returned about 10% annually, this is an average; it can be down -5% one year and then up +15% the next. Past performance does not guarantee future results. It’s essential to consider your personal risk tolerance and investment goals before investing.
3. Real Estate
Owning real estate has several advantages over holding cash in a bank account, which makes it a preferred investment for many people. Here’s why:
- Appreciation: Over the long term, real estate tends to increase in value. While market fluctuations can cause real estate prices to drop in the short term, historically, real estate overall in the US has appreciated over the long term, leading to significant capital gains.
- Rental Income: If you rent out your real estate, you can generate a steady stream of income that is often higher than the interest you’d earn on cash in a bank. This rental income can help offset the property’s costs and serve as a steady income stream, especially during retirement.
- Inflation Hedge: Real estate is often seen as a good hedge against inflation. As the prices of goods and services increase, so does the cost of renting or buying property. So, the value of your real estate and the rental income you earn from it could increase along with inflation. Replacement costs due to inflation increase the price of existing homes.
- Tax Advantages: Real estate investors can take advantage of various tax deductions such as mortgage interest, property taxes, and costs associated with rental property management. In certain countries, there are also benefits like capital gains and tax exemptions when you sell your primary residence.
- Leverage: Real estate allows for leverage, which is the use of borrowed money to increase the potential return of an investment. A mortgage allows you to buy a much larger asset than you could afford by only providing a percentage of the total cost upfront. If the property appreciates, the return is based on the total value of the property, not just the initial investment.
- Control and Flexibility: Unlike many other investments, real estate is a tangible asset you can control and utilize. You can improve the property to add value or repurpose it to suit your needs, or market demands better.
- Diversification: Adding real estate to an investment portfolio can help diversify investments and reduce risk, as real estate market performance is not directly correlated with the stock or bond markets.
Like any investment, real estate also comes with risks and downsides. It requires ongoing maintenance and repairs; it’s not as easily converted into cash as other investments (i.e., not as liquid), and various factors like changes in the neighborhood or the broader real estate market can impact it. Doing thorough research and potentially consulting with a real estate professional before investing in real estate is essential.
Like real estate, owning land can offer advantages over keeping cash in a bank. Here are some reasons why:
- Appreciation: Land often appreciates over time. While this isn’t always guaranteed, land can significantly increase in value over time in many areas, especially those experiencing growth or development. Unlike properties, land doesn’t depreciate due to wear and tear or age, and its appreciation is usually tied to factors such as location, zoning, and the overall demand for land in the area.
- Scarcity: Unlike other assets, they’re not making any more land. The inherent scarcity of land can make it a valuable asset as population growth and development increase demand.
- Potential Income Generation: Depending on its location and characteristics, land can be used to generate income. This could include leasing the land for farming, timber production, mineral extraction, Oil drilling, and natural gas wells or developing it for rental properties.
- Lower Maintenance and Costs: Unlike buildings or homes, vacant land typically requires less maintenance and has fewer associated costs. There are no utility bills, mortgage insurance, or maintenance and repairs.
- Flexibility and Control: Landowners have a lot of flexibility and control over their investments. You can decide to develop the land, sell it, lease it, or even hold onto it while it appreciates.
- Inflation Hedge: Like real estate, land can hedge against inflation. As currency’s value decreases, the price of goods and services, including land, generally increases.
- Diversification: Adding land to your investment portfolio can add a layer of diversification, reducing risk by spreading investments across different types of assets.
However, owning land also has its own set of challenges. It can be illiquid, meaning it can take time to sell, and it doesn’t provide an immediate income unless you lease or develop it. Furthermore, there can be costs and complexities associated with land ownership, such as property taxes, zoning laws, and environmental considerations. As always, conducting thorough research or consulting with a professional before investing is essential.
5. Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities (TIPS) can be a better investment than holding cash in a bank for several reasons:
- Inflation Protection: As the name suggests, TIPS offers protection against inflation. The principal of a TIPS increases with inflation (as measured by the Consumer Price Index), which protects the buying power of your investment. When TIPS matures, you receive the adjusted principal or the original principal, whichever is greater.
- Regular Interest Payments: TIPS pays interest at a fixed rate twice a year. The rate is applied to the adjusted principal, so, like the principal, interest payments rise with inflation. This provides a steady, albeit modest, income stream.
- Risk Reduction: TIPS are issued by the US Treasury, making them a very low-risk investment since they’re backed by the US government’s ability to tax its citizens. This level of security is appealing to many investors, particularly those with lower risk tolerance.
- Higher Potential Yield than Savings Account: While the yield from TIPS is typically lower than that of other investments like stocks or corporate bonds, it can be higher than the interest rate provided by a typical savings account, especially in an environment of rising inflation.
- Accessible and Tradable: TIPS can be bought and sold in the secondary market, providing some liquidity level, although the TIPS market isn’t as liquid as regular Treasury bonds. They can be purchased directly from the US Treasury at auction in increments as low as $100, making them accessible to individual investors. There are also TIPS exchange-traded funds.
However, it’s worth noting that TIPS do have some downsides. They typically don’t offer as high a return as riskier assets like stocks. They are also most effective in a portfolio when inflation is high or expected to rise. If deflation occurs, the principal adjustment of TIPS would be negative, although, at maturity, you’ll still get at least the original principal back. Lastly, while TIPS can be sold in the secondary market, their price can fluctuate, and you may not get back the full value if you need to sell before maturity. As with all investments, it’s essential to consider your personal financial goals and risk tolerance before investing.
Historically, Bitcoin has been a high-performing asset, offering potential benefits over holding cash in a bank. However, it also comes with a unique set of risks. Here are some reasons why Bitcoin has been a compelling holding for some:
- Strong Historical Returns: Since its creation in 2009, Bitcoin has seen significant price appreciation. Though highly volatile, those who purchased Bitcoin early and held on through its ups and downs have seen substantial returns.
- Limited Supply: Bitcoin’s supply is algorithmically capped at 21 million coins. This built-in scarcity is a significant part of its appeal for many investors and can lead to higher prices as demand increases.
- Decentralization: Bitcoin operates on a decentralized network, meaning any government or central authority does not control it. This makes it resistant to censorship and also means that it can’t be debased by policies such as quantitative easing, which can decrease the purchasing power of fiat currencies.
- Digital Gold: Bitcoin is often likened to “digital gold” because it shares some characteristics with the precious metal: it’s scarce, decentralized, and not linked to any specific economy. It is also “mined” to increase its supply. This comparison suggests that Bitcoin could potentially serve as a store of value and hedge against inflation, much like gold.
- Growing Adoption: Bitcoin’s growing adoption as a payment method by individuals and in the corporate world has increased its appeal as an investment. If this trend continues, demand for Bitcoin will grow.
- Potential for High Returns: Despite its volatility and associated risks, the potential for high returns makes Bitcoin an attractive speculation for some. Bitcoin’s price can rise rapidly in short periods, leading to substantial gains for traders.
However, it’s crucial to acknowledge that Bitcoin, like any speculation, is not without risk. Its price is highly volatile, and it has experienced dramatic price drops. It’s also a relatively new and complex technology and future regulatory decisions could impact its value. Furthermore, while the decentralized nature of Bitcoin has benefits, it also means there’s typically no recourse if your Bitcoins are lost or stolen. Potential buyers should consider their risk tolerance and financial goals carefully.
- Gold as a Reliable Safe Haven: Gold has proven reliable as a store of value and a haven during economic instability. Its limited supply and universal acceptance are appealing, offering a hedge against inflation and currency fluctuations.
- S&P 500 Index for Robust Returns: With its historical trend of delivering solid returns, the S&P 500 Index offers an effective passive investment strategy. It offers diversification, the potential for capital appreciation, and a hedge against inflation.
- Real Estate for Income and Appreciation: Owning real estate can provide regular income (through renting) and potential capital appreciation. Its properties as a tangible asset offer unique control and flexibility, and it can act as another layer of protection against inflation.
- Land Ownership for Control and Potential Gains: Land offers an opportunity for appreciating asset value and income generation, with the added benefits of control, flexibility, and scarcity.
- Treasury Inflation-Protected Securities (TIPS) for Risk Mitigation: These low-risk assets, backed by the US government, protect against inflation while providing regular interest payments. TIPS offer potentially higher yields than traditional savings accounts and are easily accessible.
- Bitcoin as the ‘Digital Gold’: Despite its volatility, Bitcoin’s historical performance, limited supply, decentralization, and increasing adoption have shown it as a powerful asset with high potential returns, making it a special consideration for modern personal finance decisions.
Traditional savings methods, such as holding cash in a bank, often lag behind more diverse and forward-thinking investment strategies in our current dynamic financial landscape. It’s important to explore different avenues for wealth preservation and growth. While these assets offer unique advantages over holding cash, they also possess inherent risks and complexities. Hence, any investment decision should align with individual financial goals, risk tolerance, and understanding of the underlying asset. Diversifying one’s portfolio across various asset classes remains a time-tested strategy for building wealth and safeguarding against economic uncertainty. The recent impacts on buying power due to high inflation remind us of the importance of staying informed, agile, and adaptable in personal finance management.