"The market is really volatile, it is better if I keep the cash in my savings account or in my closet." Does this sound like you? Most people think the same when it comes to investing their hard earned money in the stock market. Individuals are behind holding money rather than multiplying it.
Looking at the fluctuating nature of the market, many believe having money in their hands is the safest option to preserve money. In reality, wealth isn't for holding. Alas, you will never make a profit or double your cash by holding that money. Also, holding cash back may result in inflation, which will affect everyone including you. So what benefit you will gain by preserving the cash - this is an important question to think upon.
Is it safer and profitable to keep your money in cash or invest it in the lucrative market to make a profit? Read on to find out.
Merits of holding cash
Holding the money benefits the holder when the stock market is in its bear phase. When the stock market is in negative phase, your cash stays safe, thus forbidding unnecessary losses. Your money will be safe because it is in liquid state and have nothing to do with market fluctuation or volatility.
Additionally, having the cash in your locker or fixed deposits can give you peace of mind. You can use the cash anytime unlike the stock market investment, which don't even guarantee returns. However, there are always two sides of the same coin. With the benefits come demerits as well.
Demerits of Holding Cash
Regrettably, there is something known as inflation which is far huge and powerful that your little cash. No matter how much amount you have in your bank account or fixed deposits, inflation is going to hit you hard.
Don't get duped by your thinking that just because you have money in your account and not in the stock market doesn't mean you are safe. As the inflation rate goes up, taxes and bank charges will also increase. And you will surely lose, a small percent (if not all) of your cash in addition to loosing the purchasing power of the money day by day.
As the merits and demerits of both the options are clear, it's time to make a right choice.
The Decision Time
Looking at both the perspectives, it appears holding cash has limited or less benefits that may or may not be the right option. If you have short term goals, cash or fixed deposits or debt funds are the best choice. However, the significance of cash or safer investments to long term investors is gloomy. If you have long term objectives, refer the stock market performance of past 10 years and see how it moves and how it has benefitted investors even after a tough period. Additionally, what happens year to year doesn't affect as much when you are targeting your investment for a long period. Having a good understanding of the market may help you make huge profits. It is good to learn the stock market strategies and standard practice to start.
One of the most important thing every investor and cash holder must cognize: never let your emotions persuade your investment decisions. I actually use the opposite strategy. I buy stocks when the market is low and sell when it is high. In fact when my equity funds start falling sharply, I don't withdraw my money, instead I invest more in the equity funds.
Determining an asset allocation and sticking to it regardless of market condition and staggering your equity investments are the 2 successful strategies endorsed by most of the financial experts.
Some people invest when the market booms and sell when it is low. By doing so, they are doing opposite, selling low and buying high.
Whether you should buy stocks or hold cash is a debatable question that has no end. Since, it largely depends on your personal situation, which option suits you. However, I would recommend maintaining the asset allocation and staggering the equity investment strategy for every type of investor. Consider the merits and demerits of both the investments and make a sound decision.
The journey towards wealth accumulation to be easy for you, it is recommended to have a personalized financial plan.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at firstname.lastname@example.org