Should I Move Everything to Cash?

With recurring headlines of the demise of Europe and sharemarket volatility remaining high, this is a common question. Would I be better to move all my equities to cash so I don’t have to worry?

With the benefit of hindsight it is easy to say we should have been in cash for the last 5 years. But one year or even 5 years is not enough to rely on when making a decision.

Robin Bowerman, Principal at Vanguard Investments Australia examines this question in more detail below:

The idea of shifting from growth assets into an all-cash portfolio at this time may seem tempting to some investors.
Understandably, many investors are troubled by the deep European sovereign debt crisis, the lingering aftermath of the GFC and high sharemarket volatility.

The reality is that the annual returns from cash have been markedly higher than for Australian shares over the past 12-month and five-year periods.

Morningstar’s latest table of long-term asset class returns records that the total return from Australian shares (based on the S&P/ASX 200) was a negative 3.7 per cent for the 12 months to the end of October. And more significantly, local shares returned a negative 0.2 per cent a year over the five years.

These negative returns for shares compare with positive returns from cash for the same periods of 4.9 per cent and 5.4 per cent, respectively.

Yet looking more closely at the Morningstar statistics reveals a different angle to the cash-versus-shares issue. Over longer periods, local shares produced annual returns that were markedly superior to cash:

  • Over the 10 years to October, Australian shares returned 7.3 per cent a year against a 5.3 per cent cash return.
  • Over 15 years, shares returned 8.4 per cent a year against a 5.3 per cent cash return.
  • Over 20 years, shares returned 9.1 per cent a year against a 5.6 per cent cash return.

It should be emphasised that past returns are, of course, no guarantee for future returns. However, gaining an understanding of past long-term returns is particularly valuable when planning investment strategies and the asset allocation of investment portfolios.

The bottom-line from studying past long-term returns over different asset sectors is that having an appropriately diversified portfolio – giving close attention to an investor’s personal tolerance to risk – is  a crucial part of sound investment practice.

No asset class will outperform other asset classes every year. And sometimes the highest performer in any one year is the worst performer in the following year.

An investor who moves from shares to an all-cash portfolio during following a sharp sharemarket downturn often crystallises losses and could miss out on a possible rebound in share prices. And such investors lose the benefit of shares as a potential buffer against inflation.

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