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Why Cash Isn’t Always King

Sep 19

Investors sometimes think of cash as a safe haven during periods of volatility, or even as a steady source of income. However, with interest rates at historic lows, the returns you might be getting from deposit accounts are probably not delivering the long-term returns you need.

 

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Source: Zurich Life, April 2017. Annual management charges (AMC) apply to figures quoted (30/03/12 to 04/04/17). The fund returns shown are net of the AMC deducted by Zurich Life in our unit prices. The fund returns are based on an investment in the funds and do not represent the returns achieved by individual policies linked to the funds. These fund returns may be before the full AMC is applied to a policy. The actual returns on policies linked to the specified fund will be lower because of the effects of charges and in some cases a higher management charge. The graph above shows how one of our managed funds has outperformed cash over the past five years. It is important to be aware that investing in other asset classes, such as equities and bonds, carries the potential for higher returns than cash, but it also carries the risk of higher losses to your investment.

 

Beware of inflation

In this low interest rate environment, deposit returns can be at near zero – which is even below the rate of inflation. This means that over time inflation is eroding the value of your money. The chart below illustrates how the purchasing power of your money can decrease over time. Even at an inflation rate of 2.5%, assuming no interest return for simplicity, €100,000 will be worth the equivalent of €53,939 in 25 years’ time in terms of purchasing power. A low interest rate environment means little expected return on savings held in the bank.

 

Source: Zurich Life, April 2017. Assumptions: Constant annual inflation of 2.5% and no interest returns for simplicity. Warning: Past performance is not a reliable guide to future performance. Warning: Benefits may be affected by changes in currency exchange rates. Warning: The value of your investment may go down as well as up. Warning: If you invest in these funds you may lose some or all of the money you invest.

Source: Zurich Life, April 2017. Assumptions: Constant annual inflation of 2.5% and no interest returns for simplicity.
Warning: Past performance is not a reliable guide to future performance.
Warning: Benefits may be affected by changes in currency exchange rates.
Warning: The value of your investment may go down as well as up.
Warning: If you invest in these funds you may lose some or all of the money you invest.

ARchive

December 2018
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