Paul's Insights: Investing in cash? Think ahead
Investment markets may be unpredictable but one thing is for sure - each year seems to go by faster.
The only good explanation I’ve ever seen of why the years go by more quickly comes from ancient Greek philosophers. They argued that the sense of time came from new experiences. I get this logic. As we age, the ratio of new experiences to repeats in any year tends to become far less.
When it comes to investment markets, the reality is that, despite a ridiculous amount of media coverage and just about any prediction you care to read, absolutely nothing has changed. The one really good guide to investment markets that has proven incredibly reliable is also very simple. Take a look at where most money is flowing and this will be a very good area to avoid.
When most of your friends, people you’ve never heard of and the media tell you something like property is booming and do not miss out, it will not surprise you to find that prices are soaring. When money charges into shares and you see a big rise in prices, you will see money heading that way.
Over the past few months, vast amounts of money have flowed into cash and term deposits. In a matter of months our household savings ratio has jumped from 3.5% to 5.5% of income. We all understand why: COVID-19 has created considerable uncertainty.
Money in the bank is great for funds you need tomorrow, next month or even next year – or if you just want part of your money to be in a nice safe place. But with interest rates at record lows, quality shares look better and better, which is why the sharemarket is steadily rising despite the massive falls we saw in March.
The pandemic we are facing is challenging. But it does pay to think ahead. It is difficult to hold long-term money in a term deposit at a bit over 2% when I can buy decent shares paying dividends of 4% or more, often with franking credits, meaning tax has already been paid at 30%. Even if the shares do not rise in value, the income alone is higher.
How you invest your money depends upon you, your situation, your time frame, your attitude to risk and so on, so I’ll leave that to you. But take my advice and watch where money is flowing. If it is all flowing to one particular asset class, don’t chase the crowd.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.