For money managers like ourselves, it is very frustrating to see people losing money because they are not heeding our advice. It must be the same for doctors when they see a patient dying of a heart attack after having pleaded with him or her over many years to please change an unhealthy lifestyle.
The opportunity cost of holding on to cash is enormous over time. If we look at the first graph, we can see that on average, you will lose 54% of your potential return if you stay in cash rather than investing it in shares over a five-year period.
If we look at the second graph, it shows us the difference in actual dollars between a cash and equity investment. Over twenty years the equity investment grew to four times the size of a cash investment.
These are stats based on averages. Investing is not a difficult thing to do but we all know what the problem is: procrastination! Here are some excuses for not converting your cash into a proper equity investment:
- I don’t have enough money: Wrong! You only need a few hundred rand per month to start investing into an equity unit trust or retirement fund.
- It is too risky: Quite the opposite! You are guaranteed to lose money relative to equities over longer periods of time as the graphs above show you.
- It is not the right time, the market is too expensive at the moment: It will never be the right time. If you have a lump sum to invest, at least phase it in over a few months if you are really worried.
- I want to invest overseas but the rand is too weak: Currency is unpredictable. In 90% of the cases, if you get a stronger rand by waiting, you will have to pay more for the share you want to buy overseas.
- I am too young to start: Are you kidding me! Look at the graphs, the miracle of compounding returns will reward you generously for starting at birth.
- I will do it later: No! Just do it now.
The only other sensible thing to do with your excess cash is to pay off your bond. We would be okay with that but would issue the following warning: Don’t get addicted to debt! It is very easy to fall for all the easy credit available from banks and retailers but before you know it you get caught in a debt spiral. It would also be wise to not keep on upgrading your residential property by extending your bond. At some stage you have to either split your savings between bond repayment and equity investment, or be happy with your house the way it is and build your equity portfolio.
