The ‘cash dash’ an offshore trend to avoid, says Imara

An international dash to cash spells long-term trouble for South Africans who allow themselves to be influenced by the jitters of offshore refugees from the stock market.

The alert comes from Imara Asset Management, South Africa, a firm that advises many pre-retirees on wealth building for later life.

Managing director Lara Warburton acknowledges the shift to cash by many international saver-investors, but cautions that “a strategy based solely on capital loss avoidance just might lock in poverty 10 or 20 years down the line”.

She says “refugees” from the share market are driven by fears inflamed by international financial crises, yet some markets were showing great resilience.

In the USA, for instance, the S&P 500 index of high-capitalisation stocks has doubled since 2009. Yet a Prudential survey in the USA showed that 58% of respondents had lost faith in the market while 44% said they would never invest in stocks again.

A poll of global asset managers by Bank of America Merrill Lynch confirmed that cash positions ticked higher in June, reaching levels similar to those seen in early 2009 at the height of the global financial crisis.

Meanwhile, one British newspaper has reported that financial managers are being ordered by clients to get into cash. One fund broker said 75% of client money was going into cash while one fund said 36% of all investments now went into cash products. The investment arm of one of Britain’s biggest banks confirmed the trend and said 45% of the money from investors with a low-risk profile went into cash.

Lara Warburton believes a cash reserve for emergencies and short-term needs is prudent, but cash as the only or chief component of a long-term financial plan is asking for trouble.

She explained: “Cash takes a double hit – first from inflation, then from the tax on your interest.

“At 6% inflation, the value of your money halves in about 12 years; a staggering rate of loss. Admittedly, you earn on interest cash, but if you hold a responsible job you will probably pay 40% tax on the return.

“The asset class with the best long-term record for beating inflation is equities. The level of commitment varies from individual to individual, but even for people in their 50s there is often a good case for a major equity allocation.”

She sympathises with nervous saver-investors, but says a professional financial planner must encourage long-term thinking.

“Being worried is understandable,” Warburton noted. “But you don’t need to flee the market. You can become defensive in your stock selection or asset allocation without excluding yourself from the potential for long-term capital growth.

“Only solid capital growth can beat inflation. That’s true in North America, in Europe and South Africa. The world is interconnected these days, but that doesn’t mean we have to follow every international trend; especially when the trend might erode your hard-earned savings.”