It may be time to get out of cash and into investing, pronto! Your savings could be costing you valuable money.
by Ross Greenwood
21 July 2021
By Ross Greenwood.
These days, many investors have a philosophy of ABC. But this strategy has nothing to do with the basics of investing … it means Anything But Cash.
This approach is borne out of a view that with interest rates so low, you need to get your money out of cash and into the share-market or property markets. To put it to work as it were.
Since the pandemic, that approach has clearly paid off. Research company, Chant West says the typical managed superannuation fund, in the past year, has returned 18% after tax. Those managed super funds typically operate with around 40% in local shares; 20% in international shares; 20% in property; 10% in Government bonds and 10% in cash.
If you had gone defensive after the pandemic broke out, you might have earned 1 percent, tops, in a bank account. Then you would have had to pay tax. So, your after-tax return might have fallen to 0.7% after tax … around 25 times less return than a typical superannuation fund.
The second problem of sitting on too much cash for too long is the impact it’s having on your spending power. While price inflation is around 1.1 percent right now, you might think that you haven’t done too much damage to yourself by taking a safety-first strategy of leaving your money in the bank – at near zero interest rates. And you would be right, depending on what you want to spend your money on.
The real problem is when you want to buy investments or property in the future. Because average home prices rose 13.5% in 2020-21 (according to property data company CoreLogic), your problem is that your cash is not keeping up. In other words, if you want to use your cash to buy a property in the future, you will have less spending power … less property for your money … or you will have to borrow more to get what you want.
The argument for holding cash is if you have a suspicion that the world and markets are about to collapse into recession. While at some time in the future, you might be right … the problem always comes down to timing. Few people ever got their timing completely right when it comes to forecasting market meltdowns. And given that, until the pandemic briefly smashed our economy, Australia hadn’t seen a recession in 29 years … it’s a long time to wait for an opportunity, especially when there were so many other ways to make money in the meantime.
While it is true that with share and housing markets at all-time highs, the risks of price consolidation or even some kind of fall is heightened, the greater risk – long-term – is to do nothing at all with your money but leave it in a low interest account.
The idea of life is to turn your income from your wage into investments that grow and throw off even more income, to the point that eventually you can live off that income. Which exposes the folly of anybody – except the most risk averse – holding large amounts of cash in low interest accounts for long periods of time.
Remember … ABC.