If you’ve picked up the contradiction in the article title, you’re forgiven for being confused. What we often hear and see within the financial media is that the share market is a gamble, you’re as good as punting it, hoping to ride the next stock take off. In contrast the safety of cash is unchallenged, a sound, secure and responsible way to accumulate wealth. I want to demonstrate that this perspective around cash could be costing you thousands.
Too make the comparison, I want to draw on 20 years of raw financial data, this is boring but necessary to demonstrate the point. If you choose the perceived safety of Cash or Term Deposits for your investment nest egg, I’m almost certain you’ll run out of money should you be drawing on this source to supplement income, it’s that simple. The other point I want to demonstrate is that taking things for face value today, without researching, utilising, or acquiring knowledge is dangerous, let me demonstrate.
If I were to invest $10,000 into the Australian Share Market, or a Term Deposit in 1999 for the purpose of generating income to fund my retirement, which asset class would I choose?
So you can get a clear picture, lets time warp for a moment. In 1999 I could get 3-4% p.a. on my $10,000 share investment, through dividends/distributions, or 6.50% p.a. from a Term Deposit. Which is the better investment for income year 1….? Well there is no trick here, the Term Deposit makes me more money so it’s clearly ahead (3-4% vs 6.50%). But, what I know, retiring in 1999 I’m likely to live for another 20-25 years, so we need to understand how this unfolds long term.
Fast forward to 2020, how’s the picture played out for the “risk free” term deposit? For starters it’s still worth $10,000 in 2020, which is a win, I haven’t been affected by that big scary share market, but I’m a little annoyed about the measly 1.50% I’m getting on my Term Deposit, but surely this risk free path has put me in a better position when compared to shares…Not quite, my original $10,000 is now worth $24,100, and last year’s 2019 dividend/distribution was approx. $818, 25% more than the original 1999 Term Deposit payment, and over Five Times more than today’s available Term Deposit rate, that’s a yield of over 8% on my original $10,000. Remember though, that the Term Deposit income was more “attractive” when compared to the shares in 1999, clearly not the case today.
The question often asked, has the last 20 years been significantly different for financial markets to the 20 years preceding 1999, some would say yes, I’d argue NO. What is important though, is understanding the vogue of today will often fall out of fashion, and financial investments can be a prime example of this. The message, don’t let short sightedness direct you financially, and if you don’t have the will power to prevent poor financial decisions, consider employing professional help.
If you want to better understand investments or how investing can be applied to your personal situation, give the team at Steve May a call and start a conversation today.
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Nick Shanley, Steve May, Luke Styles and Shanley Financial Planning T/A Steve May Financial Services are Authorised Representatives / Corporate Authorised Representative of Sensibly Pty Ltd, AFSL 533923. Please refer to our website at www.stevemayfs.com.au to reference our Financial Services Guides.
