Why cash isn’t king!
Don’t believe everything you read in the newspapers – especially in the financial pages, warns Roddy Kohn
Most accountants, I suspect, use the phrase ‘cash is king’ to their clients on an almost daily basis. Are they mad? In business, not at all. After all, cash flow in business is fundamental and cash for short-term operations, purchases and acquisitions, is an absolute. So why is this oft-used term so inappropriate in the current environment and why will it lead to devastating losses for investors saving for their retirement?
A short answer lies in a recent newspaper article whose headline read: ‘Where can you safely invest your cash?’ Indeed, this is a perfectly reasonable question until you read on to discover this clearly inexperienced and naive journalist has possibly been responsible for one of the decade’s most irresponsible pieces of advice.
The journalist goes on to recommend that readers consider using a tracker fund. A tracker fund is a bag of equities that ‘track’ an index such as those shares identified by the FTSE 100. In plain English, this is the UK’s top 100 companies. This index is eminently sensible for investors who understand what they are doing and who are willing to lose part of their capital if markets fall. We can be confident no such advice can be considered a suitable place of sanctuary for the average depositor. What’s worse, this idiotic piece of advice targets those who are typically risk averse. And just because interest rates have fallen to 0.1% are now being urged to put their capital at risk. Be careful what you read!
In fact, what makes such a recommendation scary is that deposit account investors have a habit of chasing income from deposit accounts while deluding themselves into thinking their capital is safe. Of course simple mathematics puts paid to such delusion. This time last year a £250,000 deposit account holding would have generated income of £2,500. Today that same account generates just £250, so the shortfall in income of £2,250 has to be drawn from capital. Do this year after year for the next five years and you’ll soon experience the reality of security.
Light touch regulation
Banks and building societies are subject to light touch regulation. This means these institutions can make wild claims to lure investors into their poorly paying accounts. We are all familiar with these terms: ‘Safe’, ‘secure’, ‘high yield’. I remember the Leeds Building Society used the phrase ‘Liquid Gold’ to trap fearful savers into believing all was well.
In fact, there cannot be a single deposit taking institution that doesn’t know their savings accounts represent anything but safety in the way depositors’ needs are met.
This is particularly true in the current pandemic-driven, low-interest-rate environment. Throw in the real-world impact of inflation and these very same accounts are guaranteed to lose savers their purchasing power.
Let’s put this into perspective. If you had saved every year in a cash ISA from 2010-2019 you would have lost 34% OF YOUR CAPITAL IN REAL TERMS.
Perhaps this is why the journalist who urged their readers to invest in a tracker fund. The fact they have simply ignored the volatility a saver would experience in the stock market over that period appears irrelevant to sound “financial advice”.
Just for clarity, the Bank of England measured the difference in volatility between deposit accounts and a tracker fund as a factor of eight. And it’s that volatility that often leads investors to panic and foolishly cash in their tracker fund when markets fall.
Wolf in sheep’s clothing
So when investors who should have never been within a mile of the stock market panic and lose some of their capital they will have no one to blame. Why? Because inappropriate, generic advice in newspapers has no liability attached to it. A newspaper journalist could have worked at the butchers last week and just submitted an article as a hobbyist. Yep, hard to believe but truth is indeed stranger than fiction and it really does happen. And here’s why. These days newspapers are desperate to cut costs and generate alternative forms of revenue. The result? Fake news is the obvious one, but some newspapers are on commission from the insurer or in so-called partnership arrangements. Stories are run with revenue agreements in mind. And even though regulated firms must disclose their fees to consumers newspapers don’t have to. It’s the perfect storm, where risk averse investors get to read articles that push them towards risky investments.
So the next time someone says cash is king and tells you to buy a tracker, think twice. And get some advice.
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