3 April 2020
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Don't just sit on cash: if you do, you're going backwards

Andrew Main
17 July 2019

Do you despair of those unfortunates who turn up on the TV news and current affairs programmes bewailing some dire financial fate they have suffered?

I certainly do, although after hearing about the Gold Coast financial planner who put his entire savings into a Nigerian scam, I am beyond surprise.

This isn’t a complaint about the poor victims, it’s a grumble about how they got into that jam.

The capacity for people to mis-invest their hard-earned savings in one way or another, then turn up with a sad story, is a dispiriting business for the many of us who have spent years trying to save investors from their own folly. You know, diversify, increase your financial literacy and if an offering looks too good to be true, it probably is.

But the latest manifestation the other day was an elderly couple looking particularly glumly at the lousy interest rates they have been receiving on their term deposits at the bank. It looked suspiciously as though they had put ALL their spare capital in the bank.

That uninspiring circumstance certainly cannot have come as a bolt from a blue. The latest cut in official rates from 1.25% to 1% was the trigger for the story (on the ABC), but crikey, low deposit rates have been with us for a long time.

Bear in mind that until June 5 of this year when the rate came down to 1.25%, the Reserve Bank’s official rate had sat unmoved at 1.5% since 3 August 2016, or almost three years. To be pedantic, that meant 30 consecutive announcements with no move at all. To call low rates a surprising new phenomenon is a major stretch.

Conclusion: anyone in Australia who’s been sitting on anything more than a modest exposure to bank deposit rates, let’s say 15% of their savings assets to be generous, has been stoking a modest bonfire of value destruction.

I say that because even the current low annual rate of the Consumer Price Index, at less than 1.5%, is more than most banks are paying depositors.

As Peter Switzer has pointed out many times, Self Managed Super Funds in Australia are holding an average of more than 20% in cash.

Why? Maybe because they are cautious but certainly because it’s easy. It’s often a symptom of regular contributions and irregular investment decisions, basically.

It’s clearly time for those SMSF investors to start looking elsewhere for yield.

But where?

A recent article in the New York Times mentioned TINA, which stands for There Is No Alternative (to equities, in this case).

That’s a concern because the moment it looks as though there’s only one asset class worth investing in, which at this point appears to be the equity market, it’s going to be a seriously crowded trade.

So, be careful. Our share market is close to its all time high, which in the case of the ASX 200 index was 6828.7 set on 1 November 2007.

Often savers keeping doing whatever they were previously doing, in the face of clear evidence to suggest that’s not such a great idea. The irresistible force of inertia.

The big task for Australian retirement savers and retirees is to look closely at their asset allocation and ask themselves whether they are fully justified in having so much cash doing virtually nothing.

An allocation of 20% to cash is a massive ball and chain pulling down the performance of the other assets.

The next thing they should do is get some advice about which shares they should buy that have a solid earnings history and pay fully franked dividends. It’s easy to default to the banks, and right now they are running pretty hard in terms of a climbing share price, but even now they are paying retiree owners a yield of close to 10% a year by the time you include the benefits of franking.  That’s independent of capital growth, which of course cannot be relied on.

Unless the retirees have been living under a rock, they will know that if they aren’t earning enough to pay tax, they will still qualify for a refund of the tax already paid on those dividends. That’s because it was ALP policy to abolish those refunds and in the wake of the recent election loss, the ALP has abandoned that policy.

How good, to paraphrase our Prime Minister, is that? Dividend franking was essentially devised to help retirees and if they don’t take advantage of it, they only have themselves to blame.

But they shouldn’t just go for yield. That’s what stuffed the investors who went for high yielding debentures, put out by organisations with names like Banksia Securities. That one keeled over in 2012.

Some investors apparently thought it was a bank when it was actually a glorified solicitors’ mortgage fund based in a Victorian country town and named after a plant.

In this low interest environment, if anyone’s offering you more than 5% annual yield on an unlisted product, it may well be a lot further up the risk curve than it looks.

Higher yield has always meant higher risk, and nothing’s changed.

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