Shares or cash?

My older brother and I are both investors and from time to time we compare notes.  I was a bit more aggressive in my investment approach and up until the Global Financial Crisis I did much better than my brother as I was and still am very heavily invested in Australian shares, while my brother only had about half his money in shares.  He kept telling me to be more careful and to take some of my money out, but I had the view that I just couldn’t go wrong with the shares that I have.  Was my brother right after all? By the way he has sold all of his shares and now has all his money in the bank.

Mr. F

Up until the Global Financial Crisis you were well rewarded from being heavily invested in Australian shares, and if you own good quality shares such as the Big Four Banks your average return over the last five years would have been about 5% per year.  On top of that you would also have received imputation credits.

Your brother, who you say had about half his money in shares would also have done well, but not as well as you.  If he sold his shares at the peak of the market in December 2007 he obviously would have done better than if he sold at the bottom of the market in March 2009.  It is also likely that he will have had to pay capital gains tax on his profits – and the more profit, the more tax!  Now of course his money is safe in the bank and as interest rates have picked up he may be feeling quite comfortable at the moment.  Of course he will probably have income tax to pay on the interest he earns.  Interestingly, over the last three years the returns from the Big Four Banks has exceeded 10% per year before imputation credits, which is more than double the cash rate over the same period.

Then there is inflation, also on the way up.  Historically, interest on bank deposits after tax have struggled to keep pace with inflation.  This means that over time, your brother may find that though his money is safe in the bank, it has actually lost value after taking inflation and tax into account.

So who is right?  At the end of the day the “sleep test” is pretty important.  If you still sleep soundly at night with your money in shares, then you have the right approach for you.  If your brother sleeps better now that his money is in the bank, then he has made the right decision for himself.

Personally, I am in favour of more balanced investment portfolios, which are exposed to interest producing investments as well as shares.  Because of the lower exposure to shares that these portfolios have, they do not suffer nearly as much when markets fall and continue to pay a reliable level of income irrespective of share market conditions.  Yet they still benefit from capital growth when share markets rise; in addition dividends from Australian shares are very tax effective.

The information in this article is of a general nature only and should not be acted upon without first seeking personal financial planning advice. This article was provided by independently owned AFS Licensee (No. 236855) Direct Advisers Pty. Limited. They may be contacted on 02 6583 7588 or enquiries@directadvisers.com.au for a free consultation or further information.