Take Cash And Run Or Not To Run?

Newcastle Herald

Thursday September 18, 2008

Noel Whittaker

Falling interest rates may be great news for anybody paying off a mortgage, but they present challenges for investors, who are now receiving lower returns on their precious savings.

This is why it is time to think about the role of cash as an investment and consider strategies to boost returns.

A diversified portfolio should always favour shares and property because they offer great tax concessions and give the best returns over time, but any investment that offers the chance of capital gain leaves you open to the chance of capital loss.

This is why you should always look at shares and property on a long-term basis, so you are never forced to dump them when the market is having one of its normal down cycles.

Holding cash is insurance that you will always have money when needed and are never forced into a fire sale of precious growth assets.

Hence, the role of cash is to provide certainty and liquidity, which is why I have long recommended that retirees keep at least three years planned expenditure in the cash area.

The combination of the worldwide credit crunch and rising interest rates here has been a bonanza for investors in the past couple of years banks have been so desperate for money that they were offering 8.5 per cent or even higher. Those days are now far behind us.

A great resource is www.ratecity.com.au, where all financial products are compared. According to them, BankWest is still offering the top rate of 8.1 per cent for one-year deposits, with the next best rate 7.6 per cent from Macquarie Bank.

If you are prepared to lose access to your money until July next year, investing in an interest-bearing deposit with all interest and principal repayable in July 2009 is a great strategy, as you are fixing today's rates and also deferring tax until next year when the Government has hinted that personal tax rates will be lower.

If you dont want to tie your money up, St George's DragonDirect and BankWest are offering 8.1 per cent, but these will drop as rates continue to go down.

It is critical that you understand the risk/reward trade-off of shares and interest-bearing securities.

If you invest in a quality diversified portfolio of shares there is huge upside potential, with little chance of loss if you can hold for the long haul.

If you opt for fixed interest, your earnings are limited to the rate paid by the security, but if the investment goes bad you can lose the entire capital sum. This is why interest-bearing deposits can be a much riskier investment than shares if you don't stick to the big names.

For those after enhanced returns, it's hard to go past some diversified income funds that are now being offered by leading fund managers.

They invest in a range of assets that include interest-bearing securities, high-yielding shares and listed property trusts, and can produce highly effective returns because of the franked dividends that come from the shares and the tax concessions that arise from the building allowance and depreciation on the properties.

They do not offer the stability of cash, because of the presence of listed investments in the mix, but they can give you much better returns after tax than leaving your money in the bank.

Admittedly, the returns for the past 12 months have been negative, because shares are down and the listed property trust sector has copped a belting, but there is now a consensus that we are near the bottom and it's reasonable to expect returns of better than 10 per cent over the next two years.

Expect mortgage trusts to come back in favour, too. They found it hard to compete when credit was easy and banks were falling over each other to lend. Now the cycle has turned and they are receiving more loan applications than they can handle.

Yes, there are opportunities out there, but please seek professional advice before you invest. There is a huge gap between the best and the worst products and quality research is essential. Good advisers will have this on tap.

Noel Whittaker is a director of Whittaker Macnaught, a division of HBOS Australia. This advice is general in nature and readers should seek their own expert advice before making financial decisions. His email is noelwhit@gmail.com

© 2008 Newcastle Herald

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