Cash is King

[BayView]

For those out there who continue to believe that sitting in cash is a good investment right now, have a look at this little snippet from the latest Noel Whittaker newsletter I received by email today.

For those who don't know him, Noel is one of the most respected authorities on investment and finance in Australia, and has been an authority on the subject for many years, and has written a number of best selling financial education books:

"Now it's a good feeling to have plenty of cash in the bank, especially when you can get a safe 8% as you can right now, but the problem with cash is that it has no tax benefits, gives you no chance of any capital gain and is eroded by inflation. A return of $8,000 on a deposit of $100,000 sounds attractive, but tax could take $3,200 leaving you with a net return of $4,800 or 4.8% - take off 3.0% for inflation and you are left with a net return of just 1.8%. This is why holding cash over the long-term is one of the worst investment strategies of all."

Have at it.

 

[softmonkey]

i'll take 1.8% over the -20% i just saw in my super statement last night!!!

like any other investment, cash is a great option if you time it right.

 

[evand]

Silly Noel forgot to mention the compounding effects from when you reinvest the 8% interest.

My Raboplus account reinvests monthly @ 8% annually.

I dont know the maths but i'm sure the compounding looks after inflation and then some. And you cant avoid paying tax on any income earned legally, so thats a moot point.

And no, there are no tex benefits in itself. But the interest just goes into your overall income pool and you can use benefits from other sources to reduce overall tax paid. It doesnt have to be specifically from the cash account.

And as softmonkey pointed out, a definite +8% compounding is better than a negative return anyday.

The only correct point is cash is not along term position.

 

[tobe]

For property investors, cash is usually in the offset or redraw account, where it probably 'earns' closer to 9%, but isnt taxed. It actually reduces the negative gearing benifits, but it sure increases the sleep at night factor!


Cash is king if you can borrow it now while the banks are still lending, not pay interest on it while you wait to purchase something later when and if prices drop for income producing assetts.

 

[Sunfish]

Silly Noel forgot to mention the compounding effects from when you reinvest the 8% interest.

Doubt it. Noel considers compounding the eighth wonder of the world.

 

[Dazz]

Silly Noel

That shows an appalling lack of respect for a man who has dedicated his adult life to, and been at the forefront of, financially educating the Australian public for well over 25 years, and I'd go so far as to say has done more in that regard than any institution - Govt or private, or any other individual in the nation - including Jan Somers.

Quite typical for Aussies though I'm finding.

 

[evand]

Sorry...i thought he was another financial media junkie (raising his profile to make more money) peddling grandmas old fashioned money common sense.

But the fact is, its true that compounding will negate (and more) the effects of inflation. Its probably a bit boring to mention that tho.

That shows an appalling lack of respect for a man who has dedicated his adult life to, and been at the forefront of, financially educating the Australian public for well over 25 years, and I'd go so far as to say has done more in that regard than any institution - Govt or private, or any other individual in the nation - including Jan Somers.

Quite typical for Aussies though I'm finding.

 

[knightm]

compounding notwidthstanding Noels point is that when you consider inflation and tax 8% in the bank is not really 8% - I have had the same conversation with several friends lately who have sold a ppor and are loving their 8%, but they are spending the lot I keep trying to tell them their capital is shrinking...Thats what Noel is about - educating the masses.

 

[ffc1883_1996]

To add some context to this discussion...

To add some context to this discussion...

...“We like to sleep at night – that’s why we don’t have any shares”.

On the face of it, it’s a reasonable attitude given the present parlous state of the markets, but the reaction for most of us around the table was that we couldn’t sleep at night if we didn’t own shares. We enter a new financial year with negative news everywhere, so it’s probably appropriate to remind ourselves that there are three basic areas where we can invest our money – cash, property and shares.

Now it’s a good feeling to have plenty of cash in the bank, especially when you can get a safe 8% as you can right now, but the problem with cash is that it has no tax benefits, gives you no chance of any capital gain and is eroded by inflation. A return of $8,000 on a deposit of $100,000 sounds attractive, but tax could take $3,200 leaving you with a net return of $4,800 or 4.8% - take off 3.0% for inflation and you are left with a net return of just 1.8%. This is why holding cash over the long-term is one of the worst investment strategies of all.

In any event, there is a strong feeling that we are now at the top of the interest rate cycle, so in 12 months time you will be more likely to get 7.0% instead of 8.0%.

This leaves us with the good old faithfuls – property and shares. It’s important to have an interest in both these camps, but it’s just as important to understand that they behave in very different ways. It’s highly unlikely that your property will lose 30% of its value in a downturn, but there are ongoing costs such as maintenance, rates and land tax, and it can be a long drawn out process if you ever try to sell it. Furthermore, if you opt for non residential property, you can find yourself stuck with vacancies of a year or longer.

Shares will give you a much more exciting ride because their values will bounce around, but the big advantage of them is that you can buy and sell in small parcels, they provide tax advantaged income by way of franked dividends and over the long term have been the best performing asset class of all – an average of 11% per annum over the last 10 years even after taking the present slump into account Also, you will be free of hassles with tenants and body corporates.

Now, let’s get back to the “sleeping at night” bit. Think about a person who is aged 65 ... with $600,000 in super and wants to draw $40,000 a year. If their fund is diversified enough to earn 9% per annum, their money will last to age 95 if inflation averages 3% per annum. However, if they are scared of shares and opt for a “safe” 5% return, their money will be gone at 82. In an age where most retirees can expect to live to 90, that’s a thought to keep anyone awake at night.

 

[markettorrent]

One thing for sure is you want to test having your assets in other vehicles because you'll gain valuable experience, experience that allows you to make even more intelligent decisions; thus (hopefully) becoming wealthier.

 

[PrimeCommercial]

The tax benefit he's talking about.......Is that the loosing money bit?

 

[Simon]

That shows an appalling lack of respect for a man who has dedicated his adult life to, and been at the forefront of, financially educating the Australian public for well over 25 years, and I'd go so far as to say has done more in that regard than any institution - Govt or private, or any other individual in the nation - including Jan Somers.

Quite typical for Aussies though I'm finding.

I admit to being one who's life was changed by one of his books back in 1987. He was the only investment author around in those days.

 

[handyandy]

Noel forgot to mention the compounding effects from when you reinvest the 8% interest.

My Raboplus account reinvests monthly @ 8% annually.

I dont know the maths but i'm sure the compounding looks after inflation and then some. And you cant avoid paying tax on any income earned legally, so thats a moot point.

Don't know how compounding is supposed to make it all better!!!!

Don't know the compounding maths either but just take it as interest paid in advance with interest then earned on the interest paid in advance. (compounding would return less)

$100,000 earns $8k
$8000 earns $640

So all up for the year earn a little bit less than $8640.

At 40c in the dollar tax the tax will be $3456
Thus the best you earn after tax is $5184

Inflation at 3% means a loss of $3000 so you will only have earned $2184 after tax and after compounding on your $100k.

A little bit better than the $1800 (1.8%) mentioned, but not much.

Don't disagree with holding cash but certainly not a long term investment.

Best place for cash is against your loans (offsets).

Cheers

 

[joeExpat]

I'll take my tax free 8% in the bank thanks after selling up, best place to be for the next few years instead of leveraged into a -10% asset.

 

[oracle]

I'll take my tax free 8% in the bank thanks after selling up, best place to be for the next few years instead of leveraged into a -10% asset.

Can you please elaborate on the tax free 8%? How do you manage to achieve that?

 

[Mike F]

Can you please elaborate on the tax free 8%? How do you manage to achieve that?

PPOR offset maybe

 

[joeExpat]

Can you please elaborate on the tax free 8%? How do you manage to achieve that?

Offshore accounts where account holder is not subject to EU savings directive, & resident country doesn't tax non-domiciled persons when interest is not remitted to that country, so not really an option for resident Australians.

 

[oracle]

Offshore accounts where account holder is not subject to EU savings directive, & resident country doesn't tax non-domiciled persons when interest is not remitted to that country, so not really an option for resident Australians.

Oh ok..Thanks for the explanation.

Cheers,
Oracle.

 

[lui]

My money is staying in the bank earning 8% for the moment. at least its going toward offsetting the losses on my super over the past 12 months!! Just waiting it out a little longer for some good bargins to build my IP portfolio.

Lui

 

[kph]

So how is it offsetting those losses when you are taxed on the interest ?
Plus the super is quarantined in its own account surely?

I mean, if your money is in your personal bank account ( and not the super bank account) then you are personally paying tax on the interest it is earning, while the losses in the super account are quarantined in its own account.

(Is it just me?? or....)