I’m often asked about bad investments and to me they’re usually quite obvious.
Think of that mining company a mate recommends, with its key project in Afghanistan: bad investment!
Maybe an investment scheme being run by a guy named Bernie Maddoff: bad investment!
Then there’s financing Mel Gibson’s latest film, no doubt there’s an audience of three people left to watch that one: bad investment!
I’d hope we’d all be cautious enough to recognise the investments that are akin to setting your money on fire, but you’d probably be surprised if I said, “cash: bad investment!”
That’s right; long term, your money in the bank is a bad investment.
We often focus on the most obvious threat to our money: losing it, which is common sense. Yet we then ignore the silent threat to our money: the loss of purchasing power through inflation.
Time travel back to the mid 80s, Lethal Weapon is released and Mel Gibson is king.
Squeeze into your acid wash jeans and wander into a Holden dealer with $40,000. Negotiate hard and you’ll buy three Commodores.
Return to 2010 and just like Mel’s career, your money isn’t what it used to be. That same $40,000 only buys you one Commodore.
Now take a look at your ‘safe’ 6% bank interest.
Assume 30% tax; there goes 1.8%. Then assume an inflation rate of 3%, there’s 4.8% of your interest gone. That 6% in the bank is a real rate of 1.2%.
If interest rates drop or inflation rises, the remaining 1.2% is easily swallowed, leaving you with a negative rate of return.
That’s not to say cash doesn’t have benefits. If you want to offset risk, save for a significant purchase or keep a fund for emergencies, cash is the way to go.
Just don’t forget Mel and his career erosion because your money could be eroding in a similar fashion.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs. If you’d like help with your financial future, we ‘re one of only six certified fiduciaries in Australia. Want to learn more about the value of financial advice?
