Investors’ love affair with cash could be heading for heartbreak if they don’t diversify, according to the head of Australian Unity Investments, David Bryant.
Having some investment in cash products such as term deposits may be sensible for some investors, but only as part of a balanced diversification strategy, he said.
Furthermore, Bryant believes using cash as a so-called ‘safe haven’ is an increasingly unsound strategy given the market environment.
“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,” Bryant said.
Hoarding cash comes at a huge opportunity cost, he added, with fixed interest funds having performed better than term deposits in the past four years.
“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,” Bryant said.
“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.”
While there is still volatility in equity markets, and although markets are still experiencing frequent falls, there seems to be an underlying trend upwards, which Bryant believes investors should factor in when rebalancing their portfolios.
