Investing Your Money - Cash vs Shares vs Property
By John Grocke
Deciding to invest your money, in order to have a prosperous future, is a wise decision. However, it can also be a confusing one, especially when considering what area to invest your money into. It is timely, then, to consider the difference between assets like Cash/Shares/Property. Each has a different profile in terms of immediate access, but, even the view on those rules has been tested over the past few weeks.
In general terms cash at call in the bank is the most accessible and, in Australian government, guaranteed for each person to $250,000 per bank. What has become evident in a stressed environment is that a government has the right to change those rules overnight as has been evidenced in Greece.
Shares can be traded on the market daily and within 3 days you can have your proceeds. The difference is the value of your shares can change significantly in the short term – changing from either higher or lower. This then brings into question your timeline for investment in shares as the shorter the timeframe the greater the risk of change in capital value. If the capital value was lower it will likely affect your financial position.
Property is the least accessible (liquid) short term and therefore the timeline for holding the investment is the longer of all of the above.
All of the investments above can generate some level of income. The income is essential in determining the choice you have to hold the investment should it fall in value and if the amount of income is sufficient to cover what you require; the lower capital value of the asset is not an issue if you aren’t forced to sell.
Where the flexibility is lost is when you can become a forced seller. For example, interest rates rise, you then struggle with mortgage repayments and have to sell your property. If you are the only person selling in a strong market its probably ok but the likelihood is that rising interest rates are affecting many others at the same time so many of them also become forced sellers. This may then mean it takes longer or much longer to sell the property as confidence has left the market and it has become a buyer’s market.
Shares can create a similar issue as when markets turn downwards for any length of time, sellers become much greater in number and the volume of selling forces prices lower exaggerating the downturn.
In summary, if you are living off the assets it is important to retain a level of available at call funds so that in a stressed environment you do not become a forced seller and a price taker.