One of the problems with having excessive cash savings is the ultra-low interest rates most accounts pay these days.
Even by compounding the interest, there’s almost no chance for savers to keep up with inflation. And rising prices may be a big factor in the years ahead. A lot of people are worried that all the money-printing governments are doing will make the cost of goods and services rise. That’s because money printing can lead to currencies devaluing.
But as well as devaluing compared to goods and services, fiat currencies (government-issued currency) can devalue compared to physical commodities such as gold and silver. And that’s one reason the price of gold has looked like it’s been increasing over the past few years.
Potential speculative bubbles
Fiat currencies can also devalue compared with cryptocurrencies such as Bitcoin. Indeed, the value of Bitcoin compared to the US dollar and the pound sterling has gone through the roof recently.
But I don’t believe that theory about fiat currencies devaluing against commodities and cryptocurrencies is the whole story. My assumption is the huge rises we’ve seen in the price of gold and the value of Bitcoin have also been fuelled by a generous dollop of investor speculation.
Another theory I’ve heard is that cryptocurrencies could be part of a giant speculative bubble. And that bubble may one day burst just like other speculative bubbles have done in the past.
However, so far Bitcoin has defied all the sage advice and opinions offered in many articles, interviews, and comments from a variety of sources. Warren Buffett, for example, came out years ago to tell the world he thought cryptocurrencies and gold weren’t worth investing in.
For me, it’s hard to look at the rises we’ve seen in Bitcoin and gold without feeling cautious. From their elevated positions now, I reckon there’s a lot of clear blue sky below and increased risk for investors to the downside. For me, the biggest opportunity now is in shares on the stock market.
Robust classes of asset
When I look at different classes of assets, both shares and property strike me as being the most robust. For example, my own home has proved to be a good store of value over the past couple of decades when measured against cash savings. My guess is property will continue to be a decent asset to hold in the coming years.
But shares offer a solid investment option too. Each stock is backed with a potential value-generating machine called a business. And businesses have the ability to grow their earnings and assets over time and to pay shareholder dividends. As protection against the ravages of inflation, I reckon shares as an asset class are second to none.
So, in 2021, I’d aim to invest a big proportion of my overall wealth in high-quality shares and share-backed funds. The stock market rally we are seeing this year is encouraging. But I’d aim to hold on to my investments for many years and reinvest gains to compound my returns.