Over the past year, we've faced high inflation, rising interest rates, and a turbulent macroeconomic landscape. Amidst this uncertainty, investors have seen decent returns with fixed-term cash investments. But as economic indicators continue to signal that we're at the bottom of this current cycle and interest rates might drop by the end of the year or early 2025, it’s crucial to rethink whether you’re holding on to more cash than necessary.
In this blog, PMG General Manager Investor Relationships, Matt McHardy explores the opportunity cost of cash in the current environment, and how investors might be missing out on quality investment opportunities.
While maintaining cash reserves is essential, ensuring some of that cash is working for you is important. Inflation slowly erodes your money’s purchasing power, meaning your cash is actually losing value over time.
Seizing market troughs
2023 was tough, yet strategic contrarian investors still made significant moves, and there’s still time to capitalise on the current market trough. Instead of waiting for the market to react, now is the perfect opportunity to invest in assets with longer term horizons and attractive long-term yields.
It’s easy to get caught up in immediate concerns and miss out on future gains. This is known as ‘present bias’ and is often compounded by loss aversion, where the fear of losses outweighs the allure of future gains. That’s why having a long-term investment strategy is crucial, as is sticking to it through the market cycle’s ups and downs.
The power of a third-party perspective
At PMG, we always encourage investors to seek independent financial advice, as they offer an objective, informed view, helping to prevent you from making costly emotional decisions. An independent advisor can be invaluable, offering a non-emotional perspective that helps investors avoid potentially expensive mistakes.
Making your money work smarter
Given the drawbacks of holding excess cash, commercial real estate can be a compelling option. Historically resilient against interest rate fluctuations, commercial properties generate income through both rental earnings and capital gains and provide a steady revenue stream with long-term growth potential.
However, the higher asset costs can make direct investment challenging for individuals. Commercial property funds like ours provide an affordable way to own high-quality commercial real estate, diversify your portfolio and spread risk across various assets.
PMG’s retail funds are structured as multi-rate Portfolio Investment Entities (PIEs), which means investors pay tax based on their Prescribed Investor Rate, capped at 28%. Over time, these tax savings can compound, giving investors a significant advantage.
Looking ahead
As interest rates trend downward, the cost of holding cash will rise. Astute investors should explore options that preserve wealth and position their assets for growth in the next economic cycle.
Disclaimer: The information in this blog is of a general nature and was current as at 6 June 2024. It is not intended as regulated financial advice under the Financial Markets Conduct Act 2013 and does not consider your individual circumstances and financial situation. PMG does not provide financial advice. Please seek advice from a licensed financial advisor before making any investment decisions.
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