Cash is often seen as the residual, ‘uninvested’ part of a diversified portfolio, but it should form a prudent and wise amount of ballast, especially when enhanced cash improves returns.
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Nobody revalues their own home each day in the way they revalue listed equities, but does that mean the value is constant? The daily unit price is calculated in some super funds using unlisted asset valuations.
APRA’s letter to super funds highlights concerns about ‘cash’ investments. A lack of understanding might haunt investors when the next downturn comes as too many people forsake protection for yield.
The wholesale market, accessible for retail investors via managed funds (including ETFs and LICs) offers better cash yields than bank term deposits but at a higher risk. This risk can be managed via a diversified portfolio .
Continuing our look at ‘safe havens’, gold and bank deposits are often considered alternatives to ‘risky’ shares. How have they performed in times of stress, and do they rate as long-term investments at other times?
Leaving a term deposit to rollover automatically at the end of each term will almost certainly guarantee a worse return than if you read the rollover letter and do some research instead.
At any point in the cycle, the portfolios of either the optimists or the pessimists perform better. Despite stretched valuations and rising rates, the optimists are winning at the moment.
Cash gives options over future lower prices, and it avoids the risk of permanent capital loss. But it comes with another risk, the loss of purchasing power, and is not a good long-term investment.
There’s already a fuss about the appearance of the new $5 note, but there’s a lot goes into the design of our currency.
Low interest rates have left many income-oriented investors scrambling for yield. If interest rates rise, will individual bonds, dividend paying stocks or cash be safer than the core bond funds so often recommended?
Fundamentals might not be making a lot of sense right now, but sooner or later mean reversion will kick in. Nobody knows the timing but you should be standing near the exit doors to take advantage of it.
With cash investments providing such poor returns, the search for yield has driven up share and property prices, some to unrealistic levels. It has also corrupted our sense of risk which is a dangerous combination.
Despite rates of only 2-3%, term deposits and cash accounts are still the mainstay of most personal investment and SMSF portfolios. Next time you receive that renewal letter, stop and think about your options.