Where shall I put my CASH for four years?
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.