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    Money Market Performance

    With global equity markets being hard hit and not many sectors being spared, many investors have been tempted to put their investments into a money market (cash) account to take advantage of the high local interest rate environment.

    Taking your money out of the market at its peak, in hindsight, would have been an excellent decision, but the problem is that one can very rarely predict when the market’s going to peak. Equally, moving all of your investments from equities to cash only now (if you have been overweight financials and industrials) wouldn’t be the wisest move. Investors who have been sitting on the sidelines have an interesting decision to make, to hold back, or get into selected investments.

    To get a better idea of the attractiveness of cash I had a look its performance over the past 10 years or so, during high and low inflation periods, and when inflation’s been rising and falling.

    The first thing that I noticed is that while nominal interest rates go up in times of high inflation, the real return generally decreases. While this isn’t an attractive result on a real basis, we must remember that rising inflation also negatively impacts the real returns of growth assets. I then had a look at the effects of current inflation on future money market returns. I did this by lagging the money market real return by 12 months to see what kind of real returns we can expect going forward, and got the following result.

    The graph indicates that real returns generally increase after periods of high inflation. The caveat is that this is usually accompanied by a decrease in inflation; hence higher real returns going forward will be more dependent on inflation coming off its high levels than purely by inflation being high.

    Nominal returns should remain high going forward, and while this results in a higher income tax bill (for those investors whose interest income is above the exemption), a higher ‘guaranteed’ return is distinctly appetising.

    For the reasons mentioned above, our clients’ portfolios currently have an overweight portion of their total portfolios allocated to money market instruments. This cash will be deployed to other growth asset classes when value emerges.

    One needs to remember that cash should only form part of your total investment strategy, as you are guaranteed to lose money on an after tax real basis over the long term.

    Take care,

    Mike Browne

    Disclaimer: Nothing in this report should be considered personalized investment advice.

    Permalink2008-07-08, 17:26:33, by Mike Email , 1 comment
    Trackback address for this post: http://blog.sharenet.co.za/htsrv/trackback.php/844

    Comments, Trackbacks:

    Comment from: Travis Hicks [Visitor] Email · http://fmg2gold.com
    good topic, thank for share!!!!
    PermalinkPermalink 2009-04-07 @ 15:19

    This post has 1 feedback awaiting moderation...

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