Johannesburg – The recent improvement in the performance of equities has prompted many investors to review their portfolios and question whether it is better to invest in cash or equities.
There is no doubt that the markets experienced a period where the performance of equities was less than desired, but more recently the rise in the returns on equity have been both a welcome relief, but also a source of confusion for many investors.
Still sceptical about this slight improvement and having been burnt by the earlier dip in performance, many investors are understandably still unsure about what their next steps should be.
The question is whether to continue with cash deposits or withdraw from cash and invest in equities.
According to Neil Thompson, Head of Product and Customer Value Proposition at African Bank, there is no clear cut answer but a safe bet would be to rather focus on a balanced portfolio.
There are many factors that come into play when making these investment decisions but keeping cash in your portfolio is a must.
Stable portfolio
Thompson says having a cash holding can help limit losses during periods of declined equity performance. The cash serves as an anchor and keeps the portfolio stable, despite the volatility of the market. “This is a huge factor as it provides peace of mind for those with less tolerance for risk,” he says. With equities, the potential for higher returns carries the increased risk of capital loss, as well as increased short-term volatility and sleepless nights. Thompson says only if one is saving with long-term goals in mind, can an investor be positioned to tolerate volatility and thus benefit from equity exposure over time. But if one is nearing retirement and consequently running out of time for investments to return to their historic norm, or for that matter can’t tolerate as much volatility, there is still a way to get good returns and beat inflation.
Liquidity for Opportunistic business purchases.
The second key advantage of cash on hand is the ability to grab opportunities that arise quickly, especially in times of depressed markets.
Investors may question if there is any way to achieve a high investment return over the long term while still being cautious or risk-averse?
The answer from most investments experts will be a categorical no.
Thompson on the other hand disagrees saying you can achieve above-inflation returns while still being cautious.
Conventional wisdom states the only asset class proven over time to offer a return on investment which outperforms inflation, in other words, a real return, is equities – and that comes at the cost of a risk to one’s capital. While that has been true in the past, in the current environment Thompson says it is preferable to leverage a balanced portfolio with high interest investment accounts for example that offer no risk but yield excellent returns.
He says it is definitely worth doing one’s homework.
In South Africa, bank savings accounts currently offer returns ranging from 1% to a potential 8%.
The median is effectively a negative real interest rate that it is barely keeping pace with the current inflation rate of 4.6% (July2021) year-on-year. Consequently, the purchasing power of an investor’s capital will be eroded by inflation over time. In contrast, high interest bank investments can offer rates as high as 8.45% per annum, which is equivalent to 10.5% calculated on expiry after 60 months.
These high interest investments address this market and although there is no ‘one size fits all’ solution, they eliminate the need to take on unwelcome risk to one’s capital and beat inflation,” concludes Thompson.
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