2.) US Dollar Cash:
Cash will obviously hold its value and produces no volatility, but a long term position in cash will produce negative real yields.
Market Realist – Holding cash is risky, as it provides negative real returns in the long run.
In our recent post, Investing in equities beats cash in the long term, we emphasized why holding cash is risky over the long term.
Although holding US dollars (UUP) could benefit you when stock markets are down, holding them over the long term is a big no-no.
Firstly, you lose spending power, as the graph above shows. If you’ve been holding $1,000 since 2005, it would be worth only around $810 today. This is because inflation eats into your purchasing power over time. You would have lost close to 19% if you had used that strategy. We’ve used year-over-year (or YoY) inflation rates based on the CPI (consumer price index) for the illustration above.
Secondly, you would have lost the opportunity to get the decent gains that equities provide. If you had invested the same $1,000 into the S&P 500 (SPY)(IVV), you would have earned handsome returns of 67%. This is despite the deep cuts in equities during the financial crisis.
Another option is investing in US Treasuries (TLT)(IEF), which don’t provide the lucrative returns of equities over the long term. However, they do provide protection when equities are falling. The next part of this series explains.