Term deposits have been a popular place for investors to bunker down and avoid the volatility of the past few years.
So popular that Australian retail cash deposits are now at record highs.
Which is understandable, the Government’s deposit guarantee has offered security and the two historically best performing asset classes haven’t had a stellar output recently.
Shares and property have both been off the boil, leading investors to be cautious in planning their longer term investment strategy.
Discussion has now turned to this topic, with investment managers asking are investors ignoring their longer term wealth by remaining in cash?
The important thing to remember is the long term performance of asset classes.
For the past 20 years cash has returned an annual 5.9% in Australia, while over the same time frame Australian shares, measured by the ASX All Ordinaries Accumulation Index, have returned an annual 10.2%.
That difference in returns can add up over time.
If you’d invested $10,000 into both cash and Australian shares in July 1991 and left it untouched until May 2011, the returns illustrate the difference that 4.3% makes.
Investing solely in cash, your money would have grown to $31,115, while investing in shares your $10,000 would have grown to $69,262.
Right now it’s assumed many people are sitting wholly in cash, waiting for a signal that it’s safe to return to the markets.
There’s never a ‘safe time’ to invest because reward can only be achieved by assuming some form of risk.
And most market gains are made in relatively short spaces of time, meaning when people feel comfortable about shares again, the best gains have often passed.
With the deposit guarantee set to end in October, there will be increased focus on whether cash continues to hold its appeal and will potential gains be forsaken in the lead up to October?
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL / ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we think we’re Australia’s best financial planner.
