Cash is riskier than you think

This week a reader asks whether the risk of taking funds out of a money market account is worth it. The short answer: yes

Question:

I am looking for some direction and not financial advice.

I currently have the following: R1.5m lying in money market accounts; and about R1m in foreign currencies not earning any interest or income.

I am 52 and would like some direction as to what I can do to invest this money. I don’t want to lose any money but I’m prepared to take a bit of risk.

Pension funds are not growing well at present, which is a concern to me. I am with my employer pension fund at Alexander Forbes.

Answer:

Nobody ever wants to lose money; they want to make money. The only way you can achieve that is by placing your savings in short-term deposits. Your capital will remain safe and you will earn a little interest. But it’s probably the most risky strategy available. In time, inflation will eat away at your capital and the interest you earn (after tax) will hardly come close to covering your loss in purchasing power, particularly in economies such as South Africa where inflation remains high.

South African inflation has fluctuated between 4% and 8% over the past decade. Taking an average rate of 6%, which is not too far off the depreciation of the rand against the dollar over this time (around 8% per year), means every R100 you deposited in the bank 10 years ago would be worth about R54 today in purchasing power or real terms. That’s a huge loss.

Naturally, any interest received would alleviate this loss somewhat. But the interest rate offered by institutions on shortterm deposits seldom matches the inflation rate. What’s more, interest received is fully taxable.

Consequently, how do savers in South Africa ensure that their savings do not evaporate over time and consign them to a life of poverty?

Every asset class has an element of risk attached. The global rise in interest rates has highlighted the hazards of investing in the bond market.

The value of a bond, with a fixed coupon, will move either up or down with the vagaries of the fixed interest market. An investor who bought 10-year US treasuries in early January 2022, when the interest rate was 1.6%, is significantly worse off with the yield now at 3.7%.

Property attracts similar characteristics. Location, tenant quality, lease conditions, operational costs and the level of prevailing interest rates will all have some bearing on the performance of property’s return.

Personally, I choose to invest in international equities. Equities are considered high risk, but the numbers demonstrate the opposite. They are the least risky and the most rewarding of all asset classes.

R100 invested 10 years ago in the S&P 500, a gauge of the US markets, would be worth R500 today (R270 in real terms), a return of 17.6% per year. That return covers the depreciation of the rand against the dollar and the rise in the US stock market (around 9% per year).

And R100 invested in the JSE a decade ago would have increased to R187. But if we discount that amount for the impact of inflation it would still be worth around R100. Not attractive at all, but still better than leaving the money on call.

Stock markets can fluctuate and test an investor’s resolve but, over time, sound businesses with strong balance sheets and decent management that sell good products will generally increase in value. Finding those businesses is not as difficult as it appears and there are always reliable professionals to guide your selections.

The beauty today is that we can invest anywhere in the world. We are not confined to South Africa. That opens huge opportunities for investors to find the kind of companies that will allow them to mitigate the country risk and protect their spending power.