The Cost of Cash

20 July 2023 by Michael Heriot in Investments

The Cost of Cash

The term “cash is king” is often used when times get tough and there is uncertainty in markets.

Cash provides investors with security and liquidity but often falls short when it comes to generating long-term wealth. While rates in New Zealand are good now with an Official Cash Rate of 5.5%, generally, cash returns historically fall behind fixed interest, property and share markets. But, investing solely or too heavily in cash likely misses opportunities elsewhere. Over short to medium-term periods, cash can from time to time outperform bonds, property and shares. Over longer periods, cash tends to be a drag on investment growth.

Source: Booster Financial Services Limited

The Fallacy of "Wait and See"

Many investors adopt a wait-and-see approach, keeping their money in cash, hoping for the perfect opportunity to invest. However, attempting to time the market perfectly is a difficult, maybe impossible task even for seasoned professionals. Markets are notoriously unpredictable, making it difficult to identify the optimal entry or exit points. By staying on the sidelines, investors risk missing out on potential gains and growth opportunities. A Diversified Managed Fund provides a proactive investment strategy that remains flexible and adaptable, ensuring participation in various market conditions.

Time in the Markets, Not Timing the Markets

One of the fundamental principles of successful investing is time in the markets, allowing investments to compound and grow over the long term. By diversifying across multiple asset classes such as shares, bonds and property, a Diversified Managed Fund helps spread risk and capture market upswings. Attempting to time the market consistently is a challenging task, even for seasoned investors. Market timing involves predicting the highs and lows of various assets and trying to buy or sell at the most opportune moments. However, research has shown that consistently timing the market is nearly impossible, even for professionals.  By remaining invested over an extended period, you benefit from the compounding effect and capture the long-term growth potential of diverse asset classes.

Recessions and economic downturns are inevitable parts of the economic cycle.

During such periods, holding cash may seem like a safe choice to shield your investments from potential losses. However, it's essential to consider the long-term effects of inflation eroding the purchasing power of your cash over time. By investing in a Diversified Managed Fund, you diversify across different asset classes, including equities, fixed income, property, and more. This diversification helps cushion your portfolio against the negative impacts of a recession, providing a higher likelihood of preserving and growing your wealth in the long run.

Harnessing the Power of Diversification

Diversification is a time-tested strategy that reduces risk by spreading investments across different asset classes, geographies, and industries. Diversified Managed Funds enable investors to access a professionally managed portfolio, carefully crafted to optimise risk-adjusted returns. Diversification helps cushion against the volatility of individual investments, as losses in one area may be offset by gains in another. This approach helps smooth out the overall performance of the portfolio, increasing the likelihood of consistent returns over time.

Positioning Yourself for Financial Success

While holding cash may provide a sense of security, and investors won’t experience volatility, it often comes at the cost of missed opportunities and potential erosion of wealth due to inflation. Investing in a Diversified Managed Fund or adopting a diversified investment approach can offer numerous benefits, including enhanced long-term returns, reduced risk through diversification, and the ability to weather economic downturns. By embracing an appropriate investment strategy and leveraging the power of time in the markets, investors can position themselves for greater financial success.


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Article by Michael Heriot


Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.

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