ETFs vs Cash
Even renowned investors like Warren Buffet swear by holding onto cash for a rainy day. But how much cash do you need and do you in fact have excess cash that could be working harder for you?
What cash can and can’t do for you?
We all need cash. But stashing all of your cash is not necessarily a long-term solution to protecting your wealth, especially when inflation rises. When prices go up even at a steady pace over the long term, the value of your cash declines. The result? Reduced spending power and net wealth.
Comparing ETFs and cash
Saving your cash and investing in ETFs play different roles in an investment strategy. Investors sometimes advocate for keeping cash on hand; however it is only through investments that you have the opportunity to potentially make your cash work harder for you. ETFs are a great low cost, transparent and flexible investment tool.
Categorise your cash
One way to better protect your cash and make it work harder for you is to segment it. Think about categorizing your cash into the minimum you project you need for the below periods of time:
Longer-term segments allow you to explore putting cash into different savings or investments with appropriate levels of risk. Assets like high rated bonds and government securities that may be relatively low risk are not always easily available to regular investors, but ETFs can provide that access and is one of the avenues you can look into, when thinking of investing excess cash.
Expected yield on cash vs ETFs
The purchasing power of cash can decrease as inflation eats away at it over time. What’s the difference in yield for cash compared to short duration bond ETFs.
As you’ll see in the table below, short duration bond ETFs, have the potential to add more income to meet your investment goals.
Average yield for cash equivalents and short duration bond ETFs
*This graph is for illustrative purpose only
Source:
1. Monetary Authority of Singapore, as of Jun 2019. Figures refer to average rates compiled from that quoted by 10 leading banks and finance companies.
2. Based on 1-yr total return %. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted.
Cash is great but make it work harder for you
You’ll always need cash in hand, but categorizing your cash can help identify what excess cash you have to invest with, opening up new possibilities. Investing your cash into ETFs can help grow your wealth at the same time, while giving you the option of flexible trading and immediate visibility. Investing in ETFs may allow you to have the potential to meet your short or long-term financial goals quicker than if you were to hold onto cold hard cash.
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