Cash investments add value to an investment portfolio

A reader recently asked the question: I have about R100 000 cash to invest. Savings account and other investment rates offered by various banks provide far lower returns than I expected. Is it worth investing cash at the moment?

The answer is that cash is highly liquid, so allows an investor to build a ‘war chest’, or cash reserves, to use for investing in other opportunities, as and when they present themselves.  

ETFs are listed investment stocks listed on the trade exchange. Image by Markus Spiske (Unsplash).

Although cash investments offer capital and quoted guaranteed returns, other investment options may offer a higher rate of return.

 “There is no one-size-fits-all, and investors need to find the right balance for their unique requirements,” says Himal Parbhoo, CEO for Retail at FNB Cash Investments.

Stefan Janse van Vuuren, financial advisor at Brenthurst Wealth Management, maintains, “In the current market, it is good to have cash when you need it. However, in the short to medium term, cash would not have as much value when compared to other assets. The duration for medium-term investments is between four to seven years, and more than seven years for long-term investments.” For first-time investors, Janse van Vuuren suggests seeking the help of an accredited personal financial advisor, with whom one can form a long-term relationship.

“Even though information is easily available, it is important to know what you’re investing in,” he adds.

Janse van Vuuren also maintains that top investment options for the average South African looking for capital growth is found in offshore equity markets. He adds that there is a wide range of options, including traditional unit trusts, as well as thematic Exchange Traded Funds (EFTs) and index trackers.

ETFs enable investors to invest in a number of listed investments stocks listed on the trade exchange. An example of this type of product is the FTSE/JSE Top 40 Index.

FNB, for example, has a number of investment options that are tailor-made to suit individual needs. Bank generally agree that in times of market volatility and increased risk, cash investments should be used by investors as a diversification and risk mitigation tool.

“Adding a cash element to a portfolio allows an investor to decrease portfolio risk and secure an additional income stream in the form of interest,” says Parbhoo.

What about savings versus fixed accounts?

According to Parbhoo, choosing to put cash into a savings or fixed account depends on several factors:

  • Investment goal and term. For how long are you prepared to invest, and what do you want to achieve with your money?
  • Debt. If you are potentially paying off expensive debt, it may make more sense to pay off that debt first.
  • Longer term. Consider an emergency savings fund (and aim to cover three months expenses) before you invest for the longer term.

“If you do decide on cash investments, fixed deposit accounts typically earn a higher interest rate than instant-access savings accounts. They can potentially protect investors from future interest rate cuts and remove any temptation to spend,” Parbhoo says.

Cash won’t necessarily shoot the lights out in comparison to other asset classes. Image by Denise Mhlanga.

However, investors need to bear in mind that early withdrawal fees or penalties are charged if the money is withdrawn before the fixed term is up. This  can be costly. A financial advisor can help an investor to understand the terms and conditions of investing in a fixed-term account.

Factors to consider before investing

“Importantly,” says Parbhoo, “you need to know how much access you will have to the cash. With some savings, access is instant, whereas there is a notice period for others. An investor would also want to know what return they will get, and the risk associated with investing.”

“When investing any lump sum in cash, ensure that the interest earned is invested back into the same investment account. This amount will also earn interest – therefore unleashing the power of compound interest.”

Another consideration is the costs associated with some investments. These include tax implications, savings goals and terms, as well as the household or family structure, responsibilities, and the investor’s age or life stage. Also, financial advisors charge fees, which vary.

Janse van Vuuren says that we invest for different reasons. For example, people who are entrepreneurially inclined may want to store capital for when opportunities arise. Others may be investing to fund their future retirement. Therefore, when investing in equity markets, it is important to give your investment enough room for manoeuvre.

As legendary investor Charlie Munger reminds us, “The first rule of compounding is to never interrupt it unnecessarily”.

He adds, “Cash won’t necessarily shoot the lights out in comparison to other asset classes. However, it is important to have some capital readily available in cash as you don’t want to be forced to liquidate growth assets at inappropriate times”.

Edited by fellow-Safrean, Gudrun Kaiser.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Safrea or its members.


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