Cash is trash and risk is not as bad as you think – Imara
Prudence doesn’t pay and cash is trash … take those two messages to heart and investor-savers may emerge from 2013 with their wealth intact despite market conditions that remain extremely challenging.
The market insight comes from Imara Asset Management South Africa, a financial advisor and fund manager that is concerned retirees are losing out to low interest rates, rising inflation and the taxation effects on ‘safe’ income investments.
“The wealth of many middle class South Africans is being depleted slowly but surely,” says Lara Warburton, managing director of Imara Asset Management SA. “One reason is that in uncertain times many savers and investors believe prudence pays.
“They therefore put money into fixed deposits, savings accounts and perhaps the money market.
“In fact, prudence on this pattern has not paid for several years now. So-called risk assets – that means equities – have a much better track record of protecting retail investors from the effects of inflation and taxation.”
She says ‘cash is trash’ because with inflation at over 6% and maximum marginal tax on income at 40%, many people earning interest on cash holdings actually lose out.
“Cash investment is only safe in the sense that the capital is not at risk,” she adds. “You will get your principal back. But the money won’t buy as much.
“What most people need is an inflation-beating return of more than 6%. To cancel out the effects of taxation, a return of 10% or more would be even better.
“This is highly unlikely unless the individual’s portfolio contains an equity component.”
Figures from the collective investment industry indicate that growing numbers of largely conservative unit trust investors now commit to balanced and managed funds – instruments with exposure to equity markets.
However, many conservative investors still believe equities entail risk and they should avoid them altogether.
Warburton notes: “Our worry is that many savers and investors over the age of 60 maintain a traditional belief that ‘cash is king’ when excessive cash holdings simply erode their wealth in the long haul.
“It is necessary to challenge the belief in the big cash stash or the fixation with fixed deposits. Equities carry a short-term risk of loss. However, cash carries the long-term certainty of loss of real value/ purchasing power.
“But if you have a long investment horizon and no immediate need for cash, equities are not nearly as risky as their categorisation as a ‘risk-asset’ suggests.”
