Why you should hedge your portfolio with cash

Julie Brownlee, Fsp Invest, 11 Jul. 2014

Tags: inflation, cash, investing, effect of inflation on cash, deflation, holding cash, cash and high inflation, hedge your portfolio, role of cash



It may come as a surprise, but cash can serve as a good hedge in your portfolio. Including cash as part of a diversified portfolio reduces your overall risk.

Why? Because cash comes with very little risk. And this offsets investments you have in higher risk assets, such as shares.

But by holding cash, are you not at risk of inflation nibbling away at it? Let’s take a closer look…



How cash responds when inflation is falling


Different assets act differently to periods of high inflation or periods of falling inflation.

For example, when prices are falling (deflation), this is generally bad news for assets like shares and gold. But in times like this, bonds and cash do better.

Why is that?

This is because in deflationary times, the real value of your rands increases, meaning your rands go further.

You choose to invest your money because you want it to grow, Phil Oakley in Money Week explains. You want to increase its purchasing power. So when prices are falling, holding cash can make good financial sense.

But what about when inflation is on the rise? Surely your cash is better off in the market?


Why cash makes sense when inflation is rising


When inflation is increasing, the opposite is true. Your rands won’t go as far as inflation makes the cost of living more expensive.

In times like this, like at the moment, it can seem a better option to invest your cash in other assets like shares, gold and property.

Yet studies show that holding cash when inflation is rising might not be as bad as you might think.

Let’s take a look at one of these studies…

In the 1970s in the UK, inflation rose to a staggering 13%! That’s double the current rate of inflation in South Africa at the moment.

Interestingly, the real return on cash was the same as the real returns on shares over the period, even though shares would have been the obvious choice to keep your cash.

Why is that?

*********** Best seller *************

Revealed: The genius way to boost
your share price five-fold — At will.

Click here to find out how to make this profit-boosting trick work for you today!

*********************************

Well when inflation starts to climb, central banks tend to increase interest rates to try and control it. This means, if you have money in the bank and interest rates go up, your money earns a better rate of return.

Holding a portion of cash as part of your investment portfolio makes financial sense, whether inflation is on the rise or falling.

So there you have it, why you should hedge your portfolio with cash.


Related QA

Pic
d.c.heger asked:
MY QUESTION IS – I bought Bitcoin & Etherium some time ago – at first they grew nicely but now they are lower than what I paid for them. Should I [read more]
Published at 04 Apr. 2018 in: Investing 5 shares due to rocket 1 Answer
Pic
kavesh.maharaj.73 asked:
Hi Josh. I would like some advice on TFSA. I can get an interest rate of 7.8% nominal at a bank if I invest the R33k upfront in a fixed deposit [read more]
Published at 19 Mar. 2018 in: Investing Tax free savings vehicle 2 answers
Pic
kavesh.maharaj.73 asked:
Hi Josh Quantum wants to buy back shares from shall investors at what I think is a low price of around R3.86. You tipped the share in February [read more]
Published at 14 Mar. 2018 in: Investing Real wealth 5 answers
Pic
elizastrydom asked:
Hi Timon I am interested in registering for your Red Hot Storm Trader service. I am already a Red Hot Penny Shares investor. My question is [read more]
Published at 28 Feb. 2018 in: Investing Trading platform and broker 1 Answer
Pic
ManuE asked:
I have an interest in investing in Bitcoin, I just don't know how. If I buy Bitcoin with R15 000, how much can make (Return On Investment)? [read more]
Published at 25 Feb. 2018 in: Investing Investment 1 Answer

Related articles:


Latest:

Comments
0 comments