21 Jan Investing in cash is like jumping out of a plane without a parachute
Investing is hard, picking assets can sometimes feels like playing Russian roulette. Over the last 5 years, markets have been up one minute and down the next. It’s entirely understandable to see investors sell down their share and property assets and move 100% of their retirement savings into term deposits and cash. I constantly hear people say – “cash is safe and even if returns are low, at least we won’t lose the money!”
From an advisor’s perspective, stopping a client from doing this can test the strength of the client-advisor relationship. The decision to move to cash or stay invested in growth assets is often the deciding moment on whether you have a comfortable retirement or not. It’s not a decision that should be taken lightly.
Now imagine the following scenario: John and Jane are about to skydive out of a plane at 3,000 feet. The plane door opens and they both go to jump… and the only difference between them is that John is wearing a parachute and Jane isn’t. In this scenario who takes the most risk?
Most people would say that Jane does. What idiot jumps out of a plane without a parachute? But it all depends on how you define risk. If risk means uncertainty, then Jane is taking zero risk. Everyone knows what’s going to happen, Jane’s going to fall and hit the ground and that’s going to be the end of Jane. The outcome in this case is certain, and there is no risk. On the other hand, the outcome for John is more uncertain. He could land safely, he could land badly and sustain some injury but in the long term be ok, or something could go wrong and he ends up like Jane. The outcome for John is uncertain and therefore carries risk.
Placing 100% of your money in cash is like Jane jumping out of a plane without a parachute. The outcome is guaranteed even though it is ultimately unfavourable. As inflation eats away at the value of your money, a loaf of bread which once cost 5 cents could today cost over $4. If you had retired back when bread cost 5c and only earned interest on your cash, you would be unable to afford the $4 loaf. Although the return is safe and you didn’t lose any money, you can’t afford to live later on.
Retirement for most people will span more than 25 years and this is increasing as medical technology improves and we live longer. How do we ensue that we can continue to purchase that same loaf of bread 10, 15, or 20 years from now? The only answer is that like John we have to undertake some risk, and accept some volatility along the way. The only way to do this is to invest in growth assets like property and shares that are by nature designed to provide a return above the rate of inflation, thus ensuring you can continue to afford the same loaf of bread for many years to come.
Just like skydiving, this can be a scary and uncomfortable ride. At times you’re going to panic, you’re going to pray you get there safely and at other times you’re going to relish the thrill. In the end the majority of people reach the ground safely having achieved their goal. The primary role of your advisor is to help you decide on your ideal lifestyle, and strike the right balance between risk (shares and property) and safety (cash) to achieve that lifestyle. The second role of a good advisor is to prevent you from doing something stupid in a moment of panic, like jumping out of a plane without a parachute.
Kelly Pillay is the Managing Director of KLI and a representative of Australian Financial Services Licence: 452054. This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different and you should seek advice from KLI Accountants & Wealth Managers who can consider if the strategies and products are right for you.