Why Cash is King in this Declining Market

‘However beautiful the strategy, you should occasionally look at the results.’

Winston Churchill

The informed investor makes an educated guess on what they consider is the most appropriate wealth management strategy for their circumstances.

The appropriate individual strategy is subject to a number of variables — age, risk profile, income requirements, employment stability, tax position, the amount of capital available for investment, whether you’re a passive or active investor, previous investment successes and failures, the quality of the information you access on the global economy and investment markets, inflation/deflation outlook etc.

These are some of the issues we place on our personal evaluation scales.

Each variable carries a weighting that’s unique to the individual’s situation.

For example, someone who endured a horror margin lending experience would be oh so reluctant to ever again consider a ‘borrow to invest’ strategy…irrespective of how compelling the opportunity is. Whereas a person who had a favourable ‘borrow to invest’ outcome would most likely be open to rolling the debt dice again.

In recognition of the many variables that influence our thinking, it’s fair to say that when it comes to an investment strategy ‘beauty is in the eye of the beholder’.

My strategy to be cashed up was formulated on a number of factors — age, passive investment approach, the concern of loss outweighing the joy of gain, a cynical view of the central bankers ‘cures’, an appreciation of how quickly and violently markets can turn and a belief we’re at the end of the greatest credit expansion cycle in history.

With these variables foremost in my mind, being cashed up helps me sleep at night. For me, a cash position is a beautiful strategy. But I completely understand why it would be an a less-than-attractive option for others.

With the official cash rate at 1.5%, many a cashed-up investor would have good reason to reach for the ‘beer goggles’…cash looks pretty ugly at present.

However, investors who, a few years ago, couldn’t resist the lure of beauty parade (dividends) of the big banks and Telstra are sitting on some pretty ugly paper losses.

MoneyMorning 07-11-18

Source: Yahoo Finance

[Click to open in a new window]

Over the past four years, the major banks are down around 15% and Telstra almost 50%…the average loss on a portfolio of these five dividend stocks is 22%.

Add back the dividends paid (plus franking credits) and the total return over the four-year period is around 6%.

In this free report, you’ll discover why Aussie investors should avoid Telstra shares at all costs. Download now to find out.

Over the same period, cash (based on term deposit rates) has delivered (cumulatively) somewhere in the range of 10% to 12%.

Not bad for standing still.

And, there is one major difference…with cash, you still have 100 cents in the dollar. Whereas the portfolio of yield stocks has shrunk to 78 cents in the dollar.

In my view, the ugly duckling is preparing to become a swan.

But be prepared for it to get uglier before this transformation occurs. 

US market is in decline

Wall Street, despite recent positive action, is in decline.

The Fed’s ‘almost neutral’ stance on US cash rates, provides temporary relief in a downward trend. The bull is over. Now for the bear.

When the US market falls from its lofty perch, it will trigger a chain of nasty repercussions. Wall Street and global confidence levels act in tandem. The negative impact on the global economy will send us into recession/depression.

This is when it gets uglier for Australian cash rates. In response to the rather unpleasant GDP numbers, the RBA’s predictable response will be to ‘dial down’ rates.

Revealed: The truth behind our ‘unofficial’ GDP. Download the free report today.

Expect our cash rate to fall under 1%…but take comfort. At least holders of cash will still have 100 cents in the dollar.

Equity holders on the other hand, are in for some pain on two fronts…sustained capital losses and reduced dividend payouts (due to companies earning less in constrained economic conditions).

That’s the bad news…cash is going to get uglier.

The good news is, the further markets fall, the more our cash buys.

For example, at present, NAB is trading around $25…every $100 invested today buys four NAB shares.

However, if NAB shares fall to say $10, our $100 buys us 10 shares.

This example shows why the investment industry’s blanket statement of ‘cash doesn’t retain its buying power’, is not entirely accurate.

In times of market upheaval, the purchasing power of cash is increased significantly.

It’s when this situation eventuates that our ugly duckling is going to be transformed into the most beautiful swan.

Those bank statements – the ones showing pitiful interest returns – that you once could barely bring yourself to look at, will be held up as a thing of beauty. What you once kept hidden from view will become a source of pride and joy. Those statement will show a beautiful set of numbers…100 cents in the dollar.

And the transformation to the swan gets even better.

When those around you are in a state of shock, wondering how their portfolio became so disfigured by the mauling of the bear, you’ll be in the enviable position of being able to exchange your $100 for the assets they no longer find attractive.

In the beauty parade of investing, there are times when it pays to hide your best assets under a bushel.

Holing back while others hog the limelight requires discipline and an abundance of patience…but the long-term rewards from adopting a low risk/high return investment approach can have a truly transformational effect on your portfolio.

Having been through three major ‘beauty parades’ — 1987, 2000 and 2008 — I can tell you with the utmost of confidence…the uglier markets get, the more attractive your cash becomes.

Regards,

Vern Gowdie,
Editor, The Gowdie Letter


Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

To read more insights by Vern check out the articles below.


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