Thursday, January 28, 2010

Cash rich could lead to cash poor unless...

one is careful in handling the cash...

Earlier this week, I wrote about my bad service moment at the hand of UOB and, inter alia, mentioned the poor interest rates that my fixed deposits are earning.

A friend who read that post wrote to chide me as well as express his incredulity.

His email said: "You mean you still put money on fixed deposit at less than half of 1% over 18 months to grow your wealth?. The 015%pa for 3month or more fixed deposits is just robbery!

"Putting your money on less than 1% pa interest is earning negative interest as the inflation rate will impoverish you each year. Didn't you know?"

Of course I know but what's the alternative to the low Singapore dollar rates my friend's email ranted about?

The interest paid on USDand sterling is no better nowadays; even the once high yielding New Zealand is offering rates that make it a Swiss franc wannabe. Only the AUD gives rates that might outstrip inflation.

But all foreign currency deposits have inherent exchange risks. A sudden rise in the Sing $ or a sudden collapse in the foreign currency coulod wipe out all interst earnings accrued over months, even years. And sometimes take a nasty bite out of the capital as well.

One could of course invest in stocks and shares and earn a steady stream of income through capital appreciation and dividend payouts -- that is in a perfect scenario of certainty.

But stock markets aren't perfect scenarios for certainty: market risk as a result of volatile sentiment, sometimes completely unrelated to some of the stocks. A receding tide sweeps away the good and the bad. As the American sub-prime earth-quake which rocked markets far far away showed. And as the current credit brakes being applied in China are knocking down markets across the world.

Then there is the company/companies one invests in: one is at the mercy of the management in charge and the market in which the company's business operates. As a small shareholder, I will have no ability to sway the company's fortunes one way or another.

Property is another apparent investment option, especially when low interest rates make borrowing to buy  attractive.

But when interest rates are low, the property market is usually red hot, as those with the money earning paltry interest want in and those without the money want in too, as their borrowing cost would be low.

That makes the chance of overpaying for a property almost a dead cert, so that when the tide turns --such as when interest rates rise -- one could be holding an asset that's under water. And still have to repay the loan plus escalating borrowing cost.

I could paint even more frightening pictures of what could happen when a property isn't worth what it was paid for, there are no tenants and the interest on the loan taken out to buy it keeps accumulating. But I won't. Suffice it to say, property isn't for the faint hearted, even when leaving cash in the bank seems dumb.

The best bet -- if one already owns some property and has small stakes in the equity market -- remains leaving cash in the bank. If one can't preserve the buying power of the cash in hand, one is at least losing it in trickles rather than by the bucket, if one betted wrongly and large on the property and stock markets.

Meanwhile, continue to hope that property and shares already in the portfolio will provide some ballast, if not compensation, against being completely wiped out by holding some cash even as the banks continue to pay peanut shells.

No comments: