Is Cash in the Bank a Sound Investment?
I think we’re now approaching the final act of the four-year-old Global Financial Crisis.
How it will play out is anyone’s guess. But one thing’s for sure: there’s still a lot of uncertainty in this market.
And not only in shares.
The banks are overweight on mortgage debt.
Have you stopped to ask how safe your cash is?
If you perceive a risk in the stock market, do you really think it’s any safer to put your cash in term deposits or cash management accounts in Australian banks?
In this day and age, taxpayers more or less underwrite bank depositors. So while possible, it’s unlikely you would lose the cash you have in the bank.
The first point to note is banks don’t actually have your money. They take it in and then lend it to someone else. This makes banks inherently fragile and unstable. Because the bank would go bust if everyone withdrew their money at the same time (a bank run).
But ‘going bust’ usually means just the equity holders (the share investors) lose their money. Depositors rank ahead of equity investors and other lenders. So you’re at the top of the pecking order in terms of having a claim on your funds.
And even if everything was lost, taxpayers (or more accurately, your kids) will cover the loss for you.
You see, if there was a massive blow up of the banking system, your cash will be safe, thanks to the government’s $250,000 deposit ‘guarantee’. And the government would have to fork out a lot of money.
It would be interesting to see if it honoured its commitment. We guess the politicians would find a way to wriggle out of it… Or they’d just print money out of thin air to pay it… Which would DEVALUE the money you were taking out in the first place!
But interest rates are reasonably attractive in Australia. So we don’t think there is great risk in remaining in cash for the time being, both from a loss perspective and as an opportunity cost.
In fact, having access to ready cash is one of the soundest investment strategies you can follow right now to put yourself in a position to profit.
Because you’ll be able to easily invest in sound businesses when they hit rock-bottom prices. Unlike a lot of investors whose cash is tied up in the share market.
That’s one small error a lot of investors make. Locking their cash into the market, which means they won’t have it free to invest in attractive investments at the exact moment they present themselves.
Although that’s nothing compared to the three big mistakes a lot of Aussie investors are making today. I’ve recently written a free report on it. Click here to read my free report now to discover what these three bloopers are. And how you can avoid them.
Editor, Sound Money. Sound Investments.
Publisher’s Note: Greg Canavan will be appearing at After America: the Port Phillip Publishing Investment Symposium, March 14th-16th at Sydney’s Intercontinental Hotel.
This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.