Money Matters

Don’t be foolish.

Where to Stash Your Cash?

Words Rob Shears

In a world of near-zero interest rates, deciding where to invest your wealth has never been more difficult. Despite dismal returns, inflation is still expected to remain at 2 per cent or more over the coming years. The world’s largest hedge fund manager, Ray Dalio, recently quipped, “Cash is trash!” So, what should you do? It depends on your personal circumstances, but here are some options...

Bonds

As investment guru Warren Buffett stated, “Bonds are return-free risk”. At ultra-low yields, a number of bonds may not compensate you for the risk.

Property

Aussies’ love for property is not something new. What’s not to love? It’s bricks and mortar! Mortgage rates have gone one way since 1989, but are net rental yields circa 2 per cent going to compensate you for potential future rate rises? Property may be a sound investment if mortgage rates never rise, but under more normal conditions of 5-7 per cent, property could be more risky than most expect.

In the short-term, the $200 billion of free money the RBA gave the banks for 3 years will likely keep the market frothy, but property is not a short-term purchase and buying a leveraged long-term asset based on shortterm rates may not be wise.

Shares

Aussies are less excited about shares than property. Property can’t really go to zero, whereas with shares there are risks of potentially doing your dough. This could happen in extreme cases, but over the long-term shares have had a slightly higher unlevered return than other asset classes. Having said that, there has never been more speculative excess in share markets as we are seeing now, and we are certainly not at the bottom of a market cycle.

Buying the world’s best companies at reasonable prices may be the last bastion of reasonable returns. Buying a resilient company with a 25 per cent return on capital should do fine over the long-term. Some of these companies are surprisingly cheap right now. Well-known businesses like Microsoft, Amazon, Facebook, Alphabet (Google and YouTube), Unilever (Streets, Rexona, Lipton) and Reckitt (Dettol, Finish, Durex) have decades of growth ahead and offer free cash flow yields above 4 per cent. A growing 4 per cent is likely better than the return offered by other asset classes, i.e. property, bonds and cash.

Alternatives

Private equity, hedge funds, venture capital, mezzanine finance and structured products often look good, until they aren’t. With leverage, anything can look attractive at low rates.

Those stepping out of conventional asset classes into opaque, often highly leveraged structures, may be taking risks they don’t understand. The Blue Sky Alternative Investments failure, and more recently the Greensill failure, highlight the risks of going off road.

Greater fool assets

There are countless other assets that rely on the ‘greater fool theory’. These assets have no income and are solely reliant on selling to another fool at a higher price. Crypto currencies, non-fungible tokens, art, collectibles, gold, speculative companies and other zeroyielding assets have all risen considerably with the decline in interest rates and central bank intervention. In a world of zero rates, assets with no income look less dumb than in more normal times, but if rates were 15 per cent I doubt Bitcoin would be as popular.

Long-term low rates may allow these assets to continue their ascent, but there are plenty of safer ways to grow your wealth.

Never has the task of allocating capital been more difficult. Diversification, caution, avoiding doing dumb things and succumbing to FOMO are your best defence against the ‘everything bubble’.

Rob Shears is an Authorised Representative of Valor Financial Group (AFSL 405452). This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.