Super Stock Blog

Over the long haul, Buffett explains, the asset class that most investors consider the “riskiest”—stocks—is actually the safest.

The asset class that most investors consider the “safest,” meanwhile—cash—is actually extremely risky.

Thanks to even moderate rates of inflation, cash is basically guaranteed to lose huge amounts of value over time.

Credit SuisseIn the past century, for example, the value of $1.00 has fallen to 3.8 cents (see chart at right).

Stocks, meanwhile, have appreciated to the tune of ~10 percent per year.

Even since 1965, the year before I was born, the value of the dollar has plummeted 85 percent. it takes $7 now to buy what $1 bought then. meanwhile, the DOW is up 13X.

Sure, there were stock-market crashes along the way. Stocks are “high beta,” meaning that their prices fluctuate wildly. Most people, including most Wall Street investors, describe this beta as “risk.” As Buffett points out, however, it isn’t risk. It’s beta. It’s price-fluctuation. Actual risk, Buffett observes, is the risk that your investment will lose purchasing power.

Over time, investments in currency have lost a devastating amount of purchasing power.

Investments in stocks, meanwhile, have gained purchasing power. and this is true even after the lousy stock-market performance of the past decade.

Now, cash does have its place in a portfolio. What cash provides, Buffett further observes, is liquidity—a.k.a., flexibility. the future is unpredictable, and you’ll never know when you need cash. and you also never want to be forced to sell long-term investments to raise cash when the long-term investments might be experiencing temporary price fluctuations to the downside. So you have to keep some cash, even it’s an extremely dangerous long-term investment.

<a href="http://articles.businessinsider.com/2012-02-12/news/31051532_1_investments-warren-buffett-asset-classtag:news.google.com,2005:cluster=http://articles.businessinsider.com/2012-02-12/news/31051532_1_investments-warren-buffett-asset-classMon, 13 Feb 2012 14:42:25 GMT”>The Investment You Think Is ‘Safe’ Is Actually The Riskiest In The World