Where shall I put my CASH for four years?

CityPress - - TENDERS -

ELLIOT WRITES:

Ihave R500 000 in a cheque ac­count that I will not need to use for the next four years. What are the dis­ad­van­tages of keep­ing cash in one’s bank ac­count in­stead of in­vest­ing in a share port­fo­lio?

CITY PRESS REPLIES:

When it comes to se­lect­ing the cor­rect in­vest­ment, you need to un­der­stand the dif­fer­ent types of risk and how risk changes with time. Over the longer term, the risk is that your money does not keep up with in­fla­tion and your R500 000 buys less in five years’ time than it does to­day.

Although we don’t think of that as a loss, that is ex­actly what it is – you have lost your buy­ing power. That is the prob­lem with in­vest­ing in a bank ac­count – it doesn’t keep up with in­fla­tion and you will also be pay­ing some tax on that interest. This is es­pe­cially true of a cheque ac­count, where the interest is vir­tu­ally zero.

The stock market grows over time sim­ply be­cause com­pa­nies grow profits each year and, as they do, so the value of the com­pany in­creases.

In the short term, there may be ex­ter­nal fac­tors that af­fect the share price, so the com­pany may be trad­ing at a price that is less than it is worth – that is the short­term risk.

For this rea­son, you should not in­vest in a fund that has ex­po­sure to shares un­less you know you can leave the money for at least five years. If you need the money in four years’ time, you may want to limit your ex­po­sure to the eq­uity market, but have growth to keep up with in­fla­tion.

An ex­am­ple would be a lower-risk fund that has a max­i­mum eq­uity (share) ex­po­sure of 30%. These are usu­ally called low-eq­uity unit trust funds.

The aim of these funds is to pro­vide some out­per­for­mance, but also pro­tect your cap­i­tal. You would earn a mix­ture of interest and cap­i­tal growth, which would be a bit more tax ef­fi­cient than only earn­ing interest.

There is also the RSA Re­tail Sav­ings Bond, which is pay­ing 8% for a three-year fixed rate, which is guar­an­teed. This is the high­est interest rate in the market at the mo­ment.

It is worth speak­ing to a fi­nan­cial ad­viser about how this R500 000 fits into your over­all fi­nan­cial plan. For ex­am­ple, do you re­ally need to ac­cess the full R500 000 in four years’ time? If not, you may want to take a longer view on a por­tion of the funds while keep­ing some more ac­ces­si­ble. Now is a good time to get ad­vice.

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