Australian investors current love affair with cash is creating a potential ticking time bomb of portfolios that aren’t adequately diversified, it has been claimed.
These are the thoughts of Australian Unity Investments head David Bryant, who has issued a warning about the perils of relying too heavily on cash – even in uncertain times.
“While all available research shows that investors have been focused on cash as the best safe haven to protect capital, falling interest rates are making such a strategy increasingly unsound,” he said.
“Having some investment in cash products such as term deposits may be sensible for some investors, but it should always be as part of a balanced diversification strategy.
“Falling interest rates and inflation combine to reduce both the value of capital and income – exactly what investors seeking a ‘safe haven’ are trying to avoid.”
He added that now is not a good time to be overinvested in cash products, and that many investors need to redefine what they mean by ‘safe haven’ and take a closer look at other asset classes.
“Ease of access, income stability, inflation protection, capital growth as well as security, can all be important to investors depending on their circumstances and financial needs,” he said.
“Fixed interest funds have performed better than term deposits in the last four years (since the flight to cash started in earnest) and equities have given better yields than term deposits over the same period, particularly for investors on higher tax rates.”
He added that an investor who put some of their wealth into bank shares in June 2008, rather than depositing all their money in interest-bearing term accounts, for example, would have received “excellent” yield as well as capital growth.
“For example, if an investor had deposited $10,000 in a one-year term deposit in June 2008, and reinvested maturity proceeds along the way, this would have increased in value to $12,519 by June 2012.
“However, if an investor bought $10,000 of CBA shares in June 2008 it would be worth $18,819 including franking credits, in June 2012 – and we have seen even more increases in share market value in the last couple of months.”
He added that moving to a more diversified investment approach at the moment is likely to provide the access, income stability, protection and capital growth “that have become the priorities for many investors”.