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Where can you stash your cash?

Fin24 user and Chartered Financial Analyst candidate Tinashe Guramatunhu continues his tales about entering the working world, his financial ups and downs and his love-hate relationship with his credit card. He writes:

I’ve always wondered where I could save or invest cash if I got a lot of it, say a bonus. If you have been wondering where to put some cash away and wanted to assess a place to put the cash based on performance of the investment class, then this might be worth reading.

The question of where to save or invest cash is not as simple as it sounds. Much depends on a number of factors including risk profile (whether you are willing or able to invest), circumstances (time horizons, purpose of investing, etc) and the type of return you’re looking for, to name just a few factors that can influence a decision on where to invest.

I would also consider meeting with a financial planner to get a complete assessment of all options available.

However, for the use of this article I have asked the question: where are the returns of the market coming from? Is it property? The stock market (the JSE)? Or the money market?

Traditionally, one would expect the stock market to yield the highest return on a per annum basis (considering it carries the highest risk), followed by property and then the money market. It is also widely believed that property is a good way to invest and a sure way to add value to your personal portfolio.

There are many different ways of analysing data and its interpretation. In an attempt to keep this as simplistic as possible, I decided to test this over a 14-year period from January 2000 to May 2014, purely based on performance.

After some research and analysis, here are a couple of investment classes and their performance to date. The results of the analysis prove to be very interesting.



The stock market


Although the stock market (using price appreciation only) has proven to be where the highest return is earned, it isn’t always the best place to invest and is prone to being over- and underpriced.

This can be seen in returns in excess of 40% (an excellent return) in the 2005-2007 period before the well-documented financial crisis in 2008-2009, which yielded negative returns of 20% and more.

In 2003 the stock market also yielded negative returns, mainly caused by the dot.com bubble.

More recently, the stock market has performed well, yielding close to 20% per annum since mid-2012. It is nowhere near the levels of 2005-2007; howeverm it’s on a good run at the moment.

Channels that one can use to access these returns include opening up your own share portfolio account with an asset management house or online share trading account. Unit trusts are also another channel to access the market.

However, be wary of the management fees charged and the fact that historical performance returns of a unit trust are not an indication of future returns and shouldn’t be the only factor to look at when deciding a unit trust.

The money market

The money market has stayed relatively flat and more in line with inflation. The returns from money markets have fluctuated between 4% (the current level) and 10%. Interestingly, the yield derived at the moment from money markets is currently below inflation and this indicates a loss of value or purchasing power on money market investments.

Channels to this market include most of the financial services companies such as banks and asset management houses.

Property

The property market (using purchase prices only) has been on a slow decline since 2005, when it returned in excess of 30% per annum, and is currently yielding a return of 9%. Property returns are supposed to be a hedge on inflation but as seen in the graph, returns above inflation have only started improving from 2013 onwards.

Of course property is about location, location, location. And with the recent increase in interest rates I would expect property returns to decrease.

Also interesting to note is that there have been occasions in the past where the return from property has fallen below inflation. Buying property is not a no-brainer anymore; I would recommend a more thorough investigation in to the characteristics of the property.

Channels to the property market include the purchase of property directly or investing in Real Estate Investment Trusts (REITs) on the stock market.

So what now?

All in all, careful consideration should be given to the type of investment or savings vehicle used. Do your research. Hope this helps.

 - Fin24

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