Holding cash deposits because it makes you feel good?
Wednesday, 22 October 2008
Before I make any comment…if you are a cash investor…read this.
“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities. Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.”
Warren Buffet wrote to the New York Times explaining his opinions. The full article can be seen if you click here.
The current crisis has created anxiety in holding cash. So much so the governments of the world are standing behind the banks and savers deposits. A sigh of relief, but such peace of mind today, may not offer peace of mind over time. I believe in the comments made by Buffett. What he is saying is that if you back business with your capital, over time you are more likely to be rewarded than staying in cash.
Buffett goes on to say “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”
Whilst Buffett believes in the long benefit of equities, there may still be the problem for investors to be brave and "be greedy when others are fearful" as it goes against natural emotions.
So, I’ll end with an analogy. If Marks and Spencer’s reduced the price of socks by 50%, shoppers would perceive the value to be a bargain and human nature will be drawn to snapping up those socks. Of course, taking a chance on £3.50 is different to investing £350,000, yet the principles are basically the same. If the net return on cash was 3.5% per annum and net return on equities was 5.5% per annum, the 2% margin could add over £100,000 in 10 years and about £200,000 in 15 years in equities. For some investors that might mean the difference between retiring early or others having to work longer.
If you allocate your capital wisely, and stop and think about what Buffett says, perhaps through the midst of chaos that is prevalent now may appear a bright future.
posted by Murray Round Wealth Management @ 15:54,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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