Manulife Investment Management and Trust Corp. (Manulife IM Philippines) warned that simply holding cash can be a risky strategy compared to investing in the stock market as buying power of money gradually diminishes over time due to inflation.

In a statement on Thursday, June 22, Manulife IM Philippines Equities Head Mark Canizares explained that, as inflation erodes the purchasing power of cash, consumers will be able to buy less with it in the future than they can today.

Even though banks would offer higher deposit rates, Canizares still pointed out that equities, bonds, and some income-oriented investments have the potential to deliver higher long-term returns than cash.

Canizares then showed a simple calculation that illustrates the potential risks of holding cash compared to investing in stocks.

His calculation examines the return on cash between 2011 and 2021, as measured by the annualized return of the three-month US Treasury bill, which was recorded at 0.47 percent.

However, when adjusted for inflation over the same period, which averaged 2.17 percent, the real return was minus 1.7 percent.

To put this in perspective, if an individual had invested $100,000 in Treasury bills in 2011, their buying power would have decreased to $84,243.26 by 2021.

In contrast, investing $100,000 in the S&P/TSX composite dividend index over the same 10-year period would have yielded a much higher return. With an inflation-adjusted annualized return of 7.22 percent, this investment would have resulted in a buying power of $200,797.37.

Investors should also take into account the impact of real interest rates on their returns, Canizares said.

Between January and February this year, the annual nominal interest rate on three-month term deposits in many Asian countries ranged from 2.5 percent to 5.4 percent. However, this figure does not reflect the effect of inflation.

When adjusted for changes in the consumer price index during the same period, the real three-month time deposit annual interest rate was found to be much lower, ranging from negative 5.2 percent to 1.09 percent.

“History tells us that equities, bonds, and some income-oriented investments have the potential to deliver higher long-term returns than cash and could potentially outstrip inflation,” Canizares said.

Between 2009 and 2022, Asian equities and bonds had compounded annual nominal returns of 8.15 percent and 4.38 percent, respectively. Real estate investment trusts in the Asia-Pacific region also generated an annualized return of 11.38 percent.

Canizares said one of the main benefits of these investments is that they are managed by professionals who can help investors navigate market risks and volatility.

Additionally, investing in these asset classes can benefit from cost averaging and risk diversification.

“That's not to say that holding cash always leaves us at a disadvantage. There is a time and place for retaining a certain amount of cash, particularly for immediate expenses or short-term financial needs,” Canizares clarified.

“Yet if cash is destined for future spending, then it should be invested accordingly. Storing away cash for long periods is similar to voluntarily reducing the monthly savings or agreeing to lower the salary each year,” he said.