Clients losing out by hoarding cash in pandemic
entry into the market.
A report by Russell Investments said there had been flows into cash larger than during the Global Financial Crisis (GFC) and investors may have had to re-enter at high levels as the market recovered.
Unlike in the GFC when interest rates consistently remained above 4%, they were now only 0.1% which meant investors were effectively paying the bank to hold their cash.
For an investor with a portfolio of $250,000, switching to cash on 15 March, 2020, and not re-entering the market could have lost them $17,500 over the period. Meanwhile, Australians increased the cash in their bank accounts by 12% between March 2020 to March 2021 which accounted for an extra $124 billion in cash in banks.
According to FE Analytics, over one year to 31 July, 2021, the cash sector returned 0.24% while the cash enhanced sector rose 0.66% within the Australian Core Strategies universe. This compared to returns of 28% if they had invested in the ASX 200.
The situation was also a problem for super funds as SuperRatings found those in a balanced or growth super account who switched to cash last March could be up to $27,000 worse off (based on a balance of $100,000).
Bronwyn Yates, director at Russell Investments, said: “Some people are hoarding cash for security and the RBA has had to issue more $50 notes as people are also hoarding physical cash. But interest rates are so low that there’s a real cost to doing that.
“There is an opportunity for advisers to keep check that clients aren’t holding too much cash and that it isn’t detracting from their portfolio. The adviser needs to be the coach and educator for them that right now is a good time to be in the market.
“They can also set up good spending and saving behaviour and show how the client can manage their cash in an effective way.”
An adviser should try to establish a client’s motivations for holding a higher level of cash and discuss the risks involved in doing so as well as offer potential strategies that were aligned with their objectives.
This could include a diversified fixed income allocation as a defensive portion of a portfolio which could add over $18,000 to a $250,000 over 10 years.
For example, holding 30% of a portfolio in a term deposit would return an annualised 0.7% over 10 years while a weighting to term deposits, Australian fixed income and global fixed income would return an annualised 1.3% over the same period
AUTHOR
Laura Dew
Recommended for you
Clime Investment Management has faced shareholder backlash around “unsatisfactory” financial results and is enacting cost reductions to return the business to profitability by Q1 2025.
Amid a growing appetite for alternatives, investment executives have shared questions advisers should consider when selecting a private markets product compared to their listed counterparts.
Chief executive Maria Lykouras is set to exit JBWere as the bank confirms it is “evolving” its operations for high-net-worth clients.
Bennelong Funds Management chief executive John Burke has told Money Management that the firm is seeking to invest in boutiques in two specific asset classes as it identifies gaps in its product range.
