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Cash Is Trash

It has now been sometime since the world economy ran into the massive hurdle commonly referred to as the GFC.  It is now time to look at what Australia’s reaction to the GFC has been.

The period of time leading up to the GFC was punctuated by largesse on so many levels with Australians spending 103% of their earnings and, in other cases,  rushing headlong into unsustainable gearing.

Just recently the RBA released a paper which looked, in part, at the level of saving and investment in Australia in the period 1981 – 2011. Of particular interest to investors are the early 90s and late 2000s.

The early 90s was the ‘recession we had to have’ when unemployment levels went through the roof. People dipped into their savings and investments to ride out these times.

Since then increasing levels of compulsory superannuation has seen our savings level grow.  On the back of an ever improving economy with improved employment prospects and reduced interest rates combined with the de-regulation of the banking industry people’s love of investing grew.

Level of saving – left hand side

Level of investment – right hand side

Fast forward to 2008 and it is readily apparent that Australians again adopted a savings regime as they stopped spending and investing. A widespread reaction to the GFC was that many of us pulled our collective heads in and we turned from a nation of spenders into a nation of savers. Such was the turn around that Australia is now rated amongst the world’s best savers.

In the period up to 2008 the nation was spending 103% of its earnings.  In more recent years, as consumer and business confidence levels plummeted, this figure dropped to 90%. Those in the retail and sales industry can attest to the impact this had on sales and employment levels in retailing.

In recent months more and more banks and brokerage firms have reported gradual increases in lending for property. In fact one leading broking franchise was recently quoted as saying, “Gloom and doom (is) misleading as ‘green shoots’ (are) appearing in (the) mortgage market.”

The financial world and Australian housing market continue to show incremental levels of improvement. Even the Westpac Melbourne Institute Index of Consumer Sentiment rose from 108.3 in Feb to 110.5 in March. This, in itself, is not a huge jump forward but on the back of five consecutive months above 100 it is a very healthy sign. Much of the population has a increasingly positive outlook on their own situation and also on that of the nation.

In the last couple of days I have read complementary articles encouraging individuals to rethink their focus on ‘saving cash’.

One article highlighted the halving of cash rates since 2008 which have dropped, on average, by 2%.  The same article highlighted an issue all investors should be aware of. That being, “maintaining term deposits now can have a large impact on longer term retirement objectives and lifestyles as current rates simply don’t meet income requirements and certainly offer no scope for capital growth.”

As Scott Pape of ‘The Barefoot Investor’ fame recently said, “that over the long term cash is trash” and then a little later, “as a long term investment, cash is a silent thief that will rob you without you knowing it.”

Just maybe it is time for the country, and you, to undo some of the shackles and re-enter the investment sphere.  Because, as Paul Clitheroe recently said in an article in Money Magazine, “the only thing we got wrong was to become too negative – taking on a near depression mentality and assuming everything would continue to get worse.”