Is Investing In The Money Market Worth It?
* This content is brought to you by Brenthurst Wealth
By Aidan Freswick *
If you were to think of yourself as a long-term investor, you would expect some sort of capital appreciation when considering your investments over certain time periods. You would expect the impact of rising inflation to not eat away at the purchasing power of your wealth. Historically, being invested in monetary and cash-like solutions would have reassured you to know that your wealth is not exposed to uncalculated risks, not to have to follow the markets and to assume that you follow and maybe even be outperforming the rate of inflation at a suitable level. This couldn’t be further from the truth at current interest rates and if you take a look at the performance of your money market account, you might be unpleasantly surprised.
Cash investments have become a risk:
Recently, we saw the Consumer Price Index (which only measures the price of limited goods and services) hit a 14-month high at 4.4%, due to rising fuel and transportation prices. . If you look at inflation in general, you would agree that inflation should be reflected as a much higher percentage, arguably over 10%. Due to the well-known financial crisis due to COVID-19 and related aftermath, the reserve bank lowered interest rates to provide relief to indebted households and businesses. The interest rate cut was intended to discourage saving and encourage spending, to stimulate the economy in response to the pandemic. As a result, money market investments have not produced returns as in the past. If most of your wealth is invested in money-type instruments, you run the risk of capital depreciation in the current low interest rate environment. Interest rates are expected to stay low for some time to come and certainly over the next 12-18 months, despite the rising inflation environment.
Returns of the Top 5 Money Market Funds:
|Top 5 Money Market Funds||1 month||1 year||3 years||5 years|
|Cadiz BCI Money Market||0.4%||5.0%||6.7%||7.2%|
|Allan Gray Money Market||0.3%||4.6%||6.6%||7.1%|
|Hollard Prime Money Market||0.4%||4.6%||6.6%||7.1%|
|Cartesian BCI Money Market||0.3%||4.5%||6.1%||6.5%|
|SCI Counterpoint Money Market Fund – A||0.3%||4.5%||6.5%||7.0%|
Source: Morningstar; Data as of May 31, 2021
The above returns are before inflation is factored in. As it stands, this will deplete your wealth in real terms and even the average retiree has to factor in additional calculated risk to grow their wealth in real terms.
If you refer to the table below, this is the current published inflation rate (keeping in mind the prices of fuel, food and medical aid are not included in this figure. ‘inflation).
Inflation statistics for the last 5 years:
|Daily CPI Index||1 year||3 years annualized||5 years annualized||10 years annualized|
Source: Profile data June 17, 2021
In view of the above, taxation still needs to be factored into this equation, making it even less desirable. Any interest earned above the exemption rate will be fully taxable at the marginal investor tax rate:
When a money market account is suitable:
- Money market and cash-type investments are typically used for short-term purposes such as paying a deposit on a property. The nature of cash investments is that the capital is generally secure and is somewhat secured when you need to access funds.
- Cash is also used in a structured portfolio for capital preservation purposes. However, if you are a long-term investor looking for capital growth and returns above inflation, now may be the time to revisit the distribution of cash in your portfolio or look for alternative investment solutions. if all your wealth is invested in cash. investments.
Alternatives to the Money Market: Types of Unit Trusts and Exchange Traded Funds.
- Income Fund – Usually a trust fund or an exchange traded fund, which is prudently managed and used as a strategy for preserving capital in a diversified portfolio. Bonds with an adjusted risk rating offer attractive returns and can be used to improve the returns of these types of funds.
- Balanced Funds – Usually a trust fund or an exchange traded fund that is managed in a balanced manner, which generally includes various asset classes such as cash, bonds and stocks.
- Local equities – Either can be held directly, for example in a direct equity portfolio, or through a trust and ETF structure. Equities are suitable for an aggressive investor with a risk profile.
- Offshore Equities – Invested directly overseas in a direct equity portfolio, unit trust or ETF. The portfolio can be held in foreign currency, or in ZAR via an asset swap capability. Offshore investing is volatile by nature and suitable for an investor who has a long-term investment horizon and a high tolerance for risk.
Generally, structured portfolios with balanced and aggressive funds aim to beat inflation as well as returns on money market investments:
Carefully constructed portfolios are all aspects of a strong financial plan. To improve the possibility of obtaining returns above inflation, additional calculated risk must be taken within portfolios, including the decision to hold cash segments is best approached with the advice of a financial advisor. Research by global company Vanguard found that using professional advice has proven to be beneficial over time.
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