Tag Archives: money market

Cash guarantees?

We have come across many clients recently who are wanting to move their funds into the “bank” following the very poor returns of the past 5 years. Their rationale usually revolves around the fact that at least they would be guaranteed a return of ±7% per annum compared to the dismal returns from the market.

What we have to keep reminding them is that yes, they may well get a “guaranteed return” in the short term, but we can also guarantee them that they will be poorer in the future if they follow this route. Money markets are great for short term use – they are not appropriate for long-term investing. As someone once said to me “If you want to accept cash returns as your worst-case scenario, then you also have to accept cash returns as your best-case scenario”

Perhaps it is pertinent to remind ourselves about a few good old investment principles:

  • Markets move in cycles: they go up and down over time (not necessarily in that order).
  • Nobody knows exactly when this will happen – no one can consistently time the markets.
  • Equity markets (shares) should provide out-performance over the longer term (>10 years) but they are also more volatile over shorter periods.
  • High risk does not necessarily imply a high return (take gambling for instance).
  • Diversification is the prudent way to manage risk. This includes diversification among various asset classes, regions and investment styles.
  • Be mindful of the costs associated with your portfolio – higher costs will generally lead to lower returns over time.

Now is NOT the time to be deviating from your investment plan (unless your personal circumstances have changed). We don’t know which sector will perform best next nor do we know when the rand will weaken further or even if the market has bottomed. We do know, however, on balance of probability (built up over a very long time) that as an asset class, equities will outperform property which will in turn outperform bonds which will outperform cash (after tax). This is a fundamental consequence of the risk/return relationship. In fact, statistics show that SA asset classes have produced the following real returns over time:

Asset class Real return
Cash 0-1%
Bonds 1-3%
Property 2-4%
Equities 7-9%

  Source: Fortune Strategy, Bradley et al (the international experience is similar)

What investors fail to realize is that with the risk/return relationship comes volatility! There are periods (which can extend for a number of years) when the equity markets can be extremely volatile – the way to combat this is to have a well-diversified portfolio with sufficient access to cash (short term funds) so as to allow you to ignore the ups and downs in the short term. “The psychology of the speculator militates strongly against his success. For by relation of cause and effect he is most optimistic when prices are highest and most despondent when they are at the bottom.” Remember you are an investor and not a speculator.

It was Warren Buffett who said “Be fearful when others are greedy and greedy when others are fearful”. When people start to get greedy then it is time to be fearful and vice versa. From what I am seeing around me, there is too much fear – maybe, just maybe, it is time to start “getting greedy”.

Best interest rate?

With interest rates having fallen so far and the possibility of still more cuts onimages the horizon, anyone looking for interest income is pretty hamstrung at this stage. Money market rates are 7% per annum and many of the banks are offering “exceptional rates” for 1 year fixed deposits. They will even “enhance” this if you are over 55.

For anyone who is prepared to be locked in for a while there is an even better option that has been overlooked while short term interest rates have been high and that is the RSA Retail Savings Bond. It is a 2, 3 or 5 year option that is being offered by the SA Government (National Treasury) directly to the public and the interest rates are far better than anything else out there (and there are no fees to get in).  The only “catch” as I can see it is that you are locked in for the period (you can exit after 12 months but there will be an exit penalty). The rates are in the table below but for more information on this go to www.rsaretailbonds.gov.za

CURRENT INTEREST RATES

FIXED RATES
2 Year Fixed Rate 9.25%
3 Year Fixed Rate 9.50%
5 Year Fixed Rate 9.75%

They also have an inflation linked option which is also quite attractive.

That’s all for now

Gregg