Individual investors and companies have been sitting on piles of cash. / Sam Ward, USA TODAY
USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at email@example.com.
Q: How has hiding out in cash to avoid stocks worked out for investors?
A: Investors loved to brag about the stocks they owned in 1999. How things have changed since them.
During much of the past decade, it's been more fashionable to brag about being out of the market and in cash. Rattled by the market's volatility in 2000 after the dot-com bust and again in 2008 amid the financial crisis, some investors said they'd had it with stocks.
There's been a mad dash out of stocks and into just about everything but, including bonds, gold and perhaps most startlingly, cash. Investors who became fed up with the ups and downs of stocks shifted into cash because they felt they, at least, wouldn't lose money.
But that's flawed thinking, says Rod Smyth of Riverfront Investment Group. People who rushed into cash may feel good about avoiding volatility. These people, though, might not realize that their wealth has been quietly and steadily destroyed by a combination of two forces: low interest rates and inflation.
Since 2009, interest rates have been close to zero. Adding to the pain is that the official published statistics on inflation show it's running at about 2%. That means people holding cash are losing 2% a year on an inflation-adjusted basis. In fact, the destruction of the value of cash has gone on for most of the past 10 years, making it a "lost decade for cash," Smyth says.
Investors need to change their mindset toward cash. With interest rates sticking below inflation rates, sitting in cash is steadily and surely eroding the wealth of people doing so. Unless inflation falls or rates rise, investors clinging to safety by holding cash are practically guaranteeing themselves a staggering long-term loss in purchasing power, Smyth says.
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