Investments do rise and do fall in value and we strongly advise that professional advice is taken before investing your money
It is important to firstly understand what money is, its value and what it can do, so you can then consider what you should expect from your money and its role in your life.
In its simplest form money is an exchange mechanism, you can exchange money for something that you wish to purchase, or for labour given. You can retain its face value in a bank account, or purchase an asset such as gold, until such time that you may wish to spend your currency.
Typically, we acquire money through our ‘effort of labour’ and we exchange this labour for money. Payment can in theory be made in any currency and any asset but usually this will be in our local currency. We can then decide how we will use this money, either on consumable assets such as food, heating etc, or if we have more than we need for our current lifestyle, we store it for some future date to hopefully maintain our lifestyle.
The face value of a unit of a currency is maintained by the belief that it will be honoured by our ‘central banks’ and in years gone by currency was backed up by gold so you knew it was not just a piece of paper with a vague promise written on it.
So far so good, but what if we consider the current position of Venezuela, or before them Zimbabwe and others before them. The citizens of these countries have suffered greatly when the trust in their ‘money’ was lost. Let me explain a bit further, if you are an employee you agree a wage (fee) for a set amount of labour, if you find that the prices have gone up in the shops (price inflation) you demand more money for your labour (wage inflation). However, if your government decides to print more paper money, then the amount of money in circulation increases and therefore you find more money is chasing the same assets and therefore these assets will rise in cost to compensate (again inflation). The result is that the true value of the money in your pocket has gone down as you need more money to buy the ‘same’.
So, if you think about it, how safe is ‘cash’ really?
If you understand the risks involved surely it makes good sense to diversify your capital to multiple assets wouldn’t you agree? It is always interesting however when I meet people who think ‘cash is king’ because it’s safe right?
For my clients, I try to educate them so that they are not blinkered, because in the end if society breaks down what is your money worth really - maybe ask a Venezuelan?
Think for a moment, have you ever tried spending old bank notes that have been removed from circulation in a shop? - I rest my case.
What I am trying to explain here without getting too technical, is to understand what cash is, its role, what it can do and where it sits in your ‘portfolio’, but question is it really risk free and will it help me achieve my goals?!
Steven is a Fellow of the Personal Finance Society, whom is passionate about investing and getting the most from your money.
Steven Mufti & Associates Ltd is authorised and regulated by the Financial Conduct Authority.
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Registered Office address: 27 Armitage Court, Ascot, Berkshire, SL5 9TA.
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The guidance and or advice contained within this website is subject to the UK regulatory regime
and is therefore primarily targeted to customers in the UK.
The FCA does not regulate taxation advice. The value of your investments may fall as well as rise.
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