Why cash is still king: investors take advantage of high interest rates and maximise flexibility (2024)

FAQs

Why cash is still king: investors take advantage of high interest rates and maximise flexibility? ›

Why cash is still king: investors take advantage of high interest rates and maximise flexibility. Cash is seen as the most attractive asset class moving into 2024, according to a new survey. But with interest rates forecast to drop, investors are likely to start reinvesting in risk assets soon.

Because of how precious cash can be during times of financial stress, many have said that cash is king. The phrase means that having liquid funds available can be vital because of the flexibility it provides during a crisis.

Higher interest rates have gotten a bad rap, but over the long term, they may provide more income for savers and help investors allocate capital more efficiently. In a higher-rate environment, equity investors can seek opportunities in value-oriented and defensive sectors as well as international stocks.

So saying cash is king is that they have the cash to use if there's opportunity to invest right away in something that they think will be profitable in the future. It means if you can buy it with cash, its better than taking a loan for it.

It is often claimed that cash flow is superior to profit for analysing the performance of a business, and that investors should pay more attention to cash from operations, than to measures of profit. Statements such as “cash is king” or “cash flow is a fact whereas profit is an opinion” often accompany this message.

Cash allows you to keep closer control of your spending, for example by preventing you from overspending. It's fast. Banknotes and coins settle a payment instantly. It's secure.

MUMBAI: Digital payments may have made inroads into every nook and corner of the country but cash is still the king when it comes to offline purchases.

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

Higher interest rates tend to negatively affect earnings and stock prices (with the exception of the financial sector). Higher interest rates also mean future discounted valuations are lower as the discount rate used for future cash flow is higher.

The main thing that makes the rich richer is increasing prices for stocks and other investment assets. These go up when the economy is good, which also tends to push up interest rates. Asset price increases tend to make the rich richer and interest rates higher.

What is the cash is king strategy? ›

Investors use a "cash is king" strategy when securities prices in the market are high and opt to save cash for when prices become cheaper. As a form of investment, it is important to not let cash sit idle but rather to invest so that returns are at least equal to inflation.

Positive cash flow makes planning much simpler without the fear of paying expenses. It also implies you can take the time to make tactical, long-term choices that will benefit the company. As a new business owner, there's a lot to worry about. Having a strong cash flow provides you with fewer things to worry about.

It may refer to the importance of cash flow in the overall fiscal health of a business. In corporate finance, the expression refers to the fact that only future free cash flows or dividends are relevant for valuation and not, for example, accounting earnings.

Cash is king when you are able to prepare and meet those emergencies as they come without having to take on debts. Debts not only reduce your net worth, but may also reduce your credit worthiness (a significant part of your financial health) when you take on too much debts.

Here are a few other reasons why cash is king for small businesses. Cash is necessary for day-to-day operations. Without cash, you can't pay your bills, you can't make rent and you can't afford to invest in your business' future. This can hurt your bottom line.

The benefits and risks of cash

Cash is available when you need it and, unlike stocks, there's little risk to principal, especially since most savings and checking accounts, CDs and money market deposit accounts are FDIC-insured for up to $250,000 per depositor.

If a company cannot purchase new inventory, it will slowly become unable to generate new sales. If a company cannot afford its operating expenses, it will eventually go out of commission. Either way, “Cash is King” in keeping a business alive.

But while moving to a cashless society has several benefits that will accelerate its adoption, and there are legitimate concerns over the role cash will have to play as its use dwindles, there's no sign that cash is going to disappear completely.

Although cash yields are currently very high compared to recent history, expectations are that over time, they will fall from current levels. ACG's 2024 Capital Market Assumptions project that cash will generate an average annual return of 2.7% over the next ten years and 3.5% over the next 30 years.