Stay in Cash or move to Shares?

If you are not asking yourself this question yet, here are some reasons why you should:

Cash (prime overdraft rate): 15.5% (June 2008) now 13% Down 16%

The Reserve Bank changed the frequency of its meetings to monthly (excl. July) and cut the repo by 100bps in March. A further 100bps cut is expected in April which should give even more relief for the indebted. We would expect another 250bps-300bps in interest cuts which should provide a strong stimulus for equities.

Although cash provide a positive return on investment, the trend is down and you might end up earning only 9.5% on your cash at the end of the year.

SA Equities (JSE All Share): 33 000 (May 2008) now 20 000 Down 39%

Markets remain volatile and a further correction in the market cannot be ruled out. However, the second half of 2009 should be an improvement on the first, with equities expected to re-rate ahead of the economic recovery.

Equities went from its low of 17 770 (Nov 2008) to 20 000 currently. This is an improvement of 12.5% over 5 months which is a 30% annualised return.

Example on possible investment:

If you invest R100 000 in cash for 5 years and you end up earning 9.5% interest on average over the period (before tax), your R100 000 will grow to R157 424. This is an 11.49% annual growth.

If you invest R100 000 in shares for 5 years and you end up earning half the last 5 month average annual return (15%), your R100 000 will grow to R201 136. This is a 20.23% annual growth.

Conclusion

One should look at the markets objectively and intelligently. An investor should understand that investing in cash could be just as risky as investing in shares. Too much cash has an opportunity cost (earning less than one could earn elsewhere), and too much shares could have an absolute cost (losing money).

Stick to an investment philosophy of:

· Hold enough cash to cover expenses for the next 5 years.
· Invest the rest in shares, bonds and listed property.