Rules of the Game: Cash Has Its Risks

 | May 15, 2014 | 11:30 AM EDT  | Comments
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Every once in a while, there is a tragedy involving space flight. Astronauts die. And back on earth, there is much hand-wringing about safety.

When did space flight become an activity we expect to be safe? People, it's not the same as boarding a Southwest (LUV) 737 and happily munching on a bag of peanuts at 30,000 feet while you flip through the SkyMall catalog.

You probably see where I'm going with this, since Real Money is a site for investors. Who ever said investing had to be safe? Every stock broker and financial advisor on the planet has some kind of disclaimer about investing being risky. But people want that magical investment that returns 20% (or, in some of the wild traders' dreams, a number in the triple digits) with no downside risk.

I hear everyone snickering. But come on, admit it. You've wished for this, too.

Wall Street hasn't been a safe place since the Buttonwood Agreement in 1792. Before that, tulips weren't the safe investment that many in Holland thought they were.

Over the past few months, as stocks raced to new heights, a January Gallup Poll showed more than half of U.S. investors were wary of stock investing.

My colleagues and I discuss the reasons for this all the time. Prospects come in and say they were spooked by the Fiscal Cliff scare at the end of 2012. Or they just have some nagging feeling that cash is safer, for any number of reasons. A surprising number of who come to my office feel more comfortable in cash, but can't really articulate why.

Cash has risks all its own, primarily, loss of buying power. If you stash your money under the mattress, it will buy less in the future than it will today. According to data from the Bureau of Labor Statistics, the price of a loaf of bread rose 2,527% between 1913 and 2013.

Loss of buying power is a big concern for retirees. You may think that a 10-year loss of buying power is no big deal, but keep this in mind: With longevity rates on the rise, we're in an unprecedented era. Americans have to salt away enough money to last for as much as 30 or 40 years with no income from work. A loss of buying power over that period of time could be devastating.

The widespread distrust and anger at Wall Street, the Fed, Congress, the President, the former President, or you-name-it, have kept too many Americans out of the market during one of history's greatest bull runs. While millions of investors have been sitting on the sideline, stocks have doubled in the past five years. Stocks don't care whether you're angry, paranoid or just doing a really bad job of trying to time the market.

The risks of investing are well known. Sadly, the risks of not investing don't get enough attention, but can be equally destructive to wealth -- or even more so.

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