“Cash is king” is often a phrase used when markets are falling. The reason people say this is because its value doesn’t decrease. However, there are two really big downsides to holding cash or term deposits. Firstly, the income or interest you get from it is low. Secondly, its value decreases each year due to inflation. Death by a thousand cuts.
However, it has its place. Holding money in cash or term deposits is great for when you want to ensure money is available to meet future expenses i.e. those in the next 2-4 years depending on your individual circumstances.
Bonds (also known as fixed interest) is when governments or corporations borrow money. They have a fixed interest rate and guarantee to give you the money back at the end of the period. Usually, the terms are between 2 and 20 years.
Bonds generally have lower volatility than shares or property but provide higher returns than cash or term deposits.
While the main downside is they can only be purchased in large lots and it is hard to diversify across different Governments/companies, this can be overcome by investing in funds that hold a wide range of bonds.
As bonds do fluctuate more than cash, I generally don’t recommend people invest in bonds if they require access to the money in the next 1-2 years. Likewise, if your investment timeframe is greater than 5 years, it may not be wise to have any bonds due to the lower returns.
Shares, property, bonds, cash and alternative investments can all have a place in your investment portfolio, but not everyone will need to have all of them all of the time.
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