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Money Can Grow On Its Own? Cash or Cash Equivalent

callitmountfuji Read today’s Sunday Times and came across a sloppy piece of article by a senior journalist.

It referred to research by the Investment Management Association of Singapore (imas) and said that it discusses “cash, shares, bonds and unit trust.”

It later referred to the average annual return of the different categories as:

 

Shares              9.31%

Cash                 5.35%

Bond                 7.38%

Commodities  7.11%

When I saw that, I nearly fell out of my chair. You mean the money I have in my pocket will grow 5.35% without doing anything? And the journalist nicely put inflation as averaging 2.9% over the same period. You mean Singapore dollar can outrun inflation?

I just went online to the imas site to see the research in question. It stated on page 20 of their Personal Investing booklet that “Cash is a safe and liquid asset. However, you do not earn a return if it sits in a box under your bed.” I breathed a sigh of relief that at least the booklet is stating what should be pretty obvious to anyone writing on financial matters.

It also gives the definition of what cash-equivalent is, “…are instruments that are almost as liquid and safe as cash which also provide some return. These instruments are known as cash equivalents,”

So what are the categories of cash equivalents? They are:

  • savings and interest bearing checking accounts
  • fixed or term deposits accounts
  • certificates of deposits (minimum of $250,000)

I am not sure of this, but I would have thought that money market funds provided by some brokerages here should qualify as cash equivalent, but then what do I know.

On page 24 of the same booklet, it goes on to give the reason why you should invest in shares, which is what was published in Sunday Times, but with an important difference. It stated “Cash Equivalent” and not what the article in the Sunday Times stated as “Cash.”

You may argue that it is a matter of semantics. But in this case, when you are publishing to millions of readers, you have the responsibility of making sure what you are writing about makes sense. Else there maybe gullible readers who will think, “Hey, I don’t have to invest, since my cash will grow 5% annually.”

Cash is NOT Cash Equivalent.

 

Source:

1. Introduction to Personal Investing by imas

2. Making Sense of Financial Jargon By Lorna Tan Sunday Times 11 April 2010

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2 comments:
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la papillion said...
April 11, 2010 at 11:26 PM  

Haha, you're quite sharp. I read that article but I didn't think much of it. You're right! Cash equivalent is NOT EQUAL to cash, haha :)

Good job in spotting the error!

gravatar
Lemizeraq said...
April 12, 2010 at 11:09 PM  

Hi LP,

Yah, it is sort of like an occupational hazard that refuses to go away.

I used to be a teacher. Easier to spot other people's mistakes than my own :)

Lemizeraq

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