Keeping your funds in cash is generally viewed as much safer than holding them in stocks. This is because, on any given day, the value of the US and UK capital stock – as measured by the NYSE and FTSE indices – can easily fluctuate by one or two percentage points either way. By contrast, the purchasing power of cash, unless you find yourself in an inflation hellhole like Venezuela, can be assumed to remain fixed from one day to the next. Cash is a better short-term store of value.
But the picture changes radically once one takes a longer-term view. Imagine you had $1,000 fifty years ago. If you’d kept it in cash for the ensuing half-century, the purchasing power of that $1,000 would have been considerably dented by inflation. Specifically, it would buy you less than one-seventh of the goods and services which you could acquire in January 1968, according to the Federal Reserve. There have of course been improvements in technology and delivery that this depreciation doesn’t account for, but the point remains that cash has of late been a rather poor investment good.
Suppose that you had instead bought a broadly diversified set of stocks, say, those composing the Dow Jones 30 index of large American industrial firms. There were no index funds yet in 1968 – Vanguard’s Jack Bogle only marketed the first one in 1975 – but suppose that, just like index fund managers do, you’d simply rebalanced your portfolio each month to reflect the changing weights and composition of the Dow 30 index. How much would your $1,000 investment be worth today?