Many are interested in the question of how safe is cash (or deposits) to store their money savings. Today, we decided to tell you why it is better to entrust your funds with high-quality diversified investments.
To begin with, over the past 100 years, even the most stable currencies have experienced repeated shocks. The dollar, for example, was devalued twice :
- 1933 year
The dollar is falling sharply against gold. The rate drops sharply from 25.8 to 15.238. At the same time, a ban on the possession of gold is introduced.
- 1971 year
The abandonment of the Bretton Woods system leads to a dramatic drop in the dollar against gold.
Surely many of you do not remember this, since you only went through the crises of 2008 and 1998. Then, keeping in cash paid off. But, do not forget that now such an investment loses much to a long-term one.
It is very important to take into account the difference between the crisis drop in quality instruments and the depreciation of the currency. If in the first case it is not so tragic, then the second can deprive you of everything. You can wait out the crisis drop, and the purchasing power of your capital will return. In case of depreciation, the loss is irretrievable.
Over the past 100 years, the purchasing power of the dollar, in terms of gold, has been waning. The S & P500 index, despite strong fluctuations, shows stable growth.
Large brokerage companies and investment funds are well aware of the possible risks, and, accordingly, take them into account when creating portfolios. Basically, they focus on those assets that will not suffer if currencies depreciate. For example stocks, real estate, etc.
As history shows, devaluation occurs unexpectedly and on a large scale. Quality assets usually fall in value for a short period of time, while currency depreciation is an irreversible process.
At the moment, there are two threats to the currency:
- The risk of currency printing
- Growing influence of China
Let’s consider each of them separately.
The risk of currency printing
One of the most respected governors, Ray Dalio, has been actively talking about the risks that the world’s central banks will increase the amount of printed currency. In his publications Paradigm shifts and The World Has Gone Mad and the System Is Broken, he talks about the problems of the global financial system and the subsequent shift in the investment paradigm.
In his Paradigm shifts article, he writes that investors have become too accustomed to current market trends over the past 10 years. Changing realities does not affect the investment approach in any way. This, in turn, brings with it an inflection point and a subsequent shift in the investment paradigm. The obvious excesses are: a huge volume of bonds in the market, which is traded with negative yields ($ 12-17 trillion) and an increase in the US budget deficit to $ 1 trillion.
In his articles, Ray Dalio talks about important factors influencing the increase in the amount of printed currency. The main factors are:
- Money is neither an obstacle to inflation, nor a stimulus for economic growth. Investors who receive them prefer to invest money rather than spend it. The result is a decrease in the prospects for making a profit on quality assets.
- If income continues to decline in the future, this will lead to the fact that the state will not be able to fulfill its obligations on health care and the issuance of pensions. The budget deficit will continue to grow.
- There are three ways to solve the problem: reduce liabilities, raise taxes, or start printing more money. The advantage of the latter option is that it will not lead to open conflict in society. It is more convenient to realization because it has no formal restrictions.
- The main problem of the third solution is the threat of a decline in the reserve function of major currencies, such as the dollar, euro, and yen.
Growing influence of China
Over the past 25 years, China has greatly expanded its range of influence on the global economy. Due to the growing demand for the yuan, the need for this currency in reserves and trading operations will soon increase. This is accompanied by a decrease in demand for other currencies (dollar, euro, and yen).
The second threat, in my opinion, is the rapid growth of China’s influence in the world economy over the past 25 years. Sooner or later, the demand for the yuan in reserves and trading operations will increase, with a corresponding decrease in demand for the dollar, euro and yen.
Today, China is steadily approaching the status of a leader in the field of innovation. The total capitalization of IT startups, which are valued at more than $ 1 billion, almost reached the same figure in the United States.
The valuation of the value of China’s domestic stock and bond markets increased to 8 and 10 trillion. Market investment in RMB is expected to become the norm in the near future. This, in turn, will affect the strengthening of positions.
Today cash is not recommended for long-term placement of your funds. Golden Stanley recommends placing your finances in diversified investments. The main reason is that currency depreciation is irreversible and there is a prospect of recovery in sound investments.