The opportunity cost of cash
Friday, 2 August 2024
A Property Fund Manager’s perspective
For strategic investors, now is the time to explore investment options that not only preserve wealth, but also position their assets for growth in the next phase of the economic cycle. Over the past year, high inflation, rising interest rates, and a turbulent macroeconomic landscape have made fixed-term cash investments more attractive. However, with signs indicating we’re nearing the bottom of this cycle and likely interest rate drops ahead, holding excess cash could mean missing out on market opportunities to buy at value.
“Maintaining sufficient cash reserves is crucial for a balanced investment strategy, and of course, to meet your short-term desires such as a new car, travel or a home renovation, but it’s important to keep in mind that inflation will gradually diminish your money’s purchasing power. So, you want to make sure you put some of that cash to work,” says PMG General Manager Investor Relationships, Matt McHardy.
Maintaining a long-term view in market troughs
While 2023 proved persistently challenging, we continued to see transactions from strategic contrarian investors.
“There is still time for investors to take advantage of opportunities in the current market trough. Instead of waiting for the rest of the market to react, now is the ideal opportunity for investors to set their portfolios up for growth by investing in assets with longer maturities and attractive long-term yields,” says Matt.
“There is still time for investors to take advantage of opportunities in the current market trough”
Understanding the impact of missed investment opportunities can be challenging, so it’s easy to prioritise immediate concerns over distant financial goals. This behaviour is known as ‘present bias’, and is further complicated by loss aversion, where the fear of potential losses outweighs the appeal of future gains. When faced with the decision to invest or hold on to cash, it’s crucial for investors to create a long-term strategy and stick to it throughout the ups and downs of market cycles.
“That’s where involving a financial advisor can be invaluable – they can prevent you from making potentially expensive mistakes by offering an objective, non-emotional view,” says Matt.
Make your cash work smarter
Given the potential pitfalls of holding excess cash, commercial real estate presents an attractive option for several reasons. Having traditionally proven to be resilient against interest rate fluctuations over the long term, commercial properties also generate income through both rental earnings and capital gains, offering a consistent revenue stream and steady long-term growth.
However, with typically higher asset costs, it’s more challenging for individuals to invest in commercial real estate. Commercial property funds like PMG’s give investors an affordable way to own high-quality commercial property and diversify their portfolio, spreading risk across various assets and protecting against market volatility.
“PMGs funds are also structured as multi-rate Portfolio Investment Entities (PIEs), which means investors pay tax based on their Prescribed Investor Rate, capped at a maximum of 28%. Over the long term, the benefit of these tax savings can compound, and investors stand to gain a bigger advantage over time. Particularly for trusts now given that the flat tax rate is 39%” says Matt.
If interest rates head downward as economists are predicting, the cost of holding cash will increase. For strategic investors, now is the time to explore investment options that not only preserve wealth, but also position their assets for growth in the next phase of the economic cycle.
Disclaimer: The information in this article is of a general nature and was current on 1 June 2024. It is not intended to be regulated financial advice for the purpose of the Financial Markets Conduct Act 2013 and does not take your individual circumstances and financial situation into account. PMG does not provide financial advice. Please seek advice from a licensed financial advice provider before making any investment decisions.
Browse
Topic
