Despite dropping interest rates, tremendous uncertainty surrounding markets as a result of COVID-19 may lead many South Africans to retreat to the comfort of cash. While this may be the right decision in the short-term, holding this position for an extended period could be detrimental to achieving long-term financial goals.

This is according to Gontse Tsatsi, Head of Retail Distribution at Old Mutual Investment Group, who says that recent successive interest rate cuts suggest that it’s a good time for those currently sitting on a lupm sum of cash to consider investing instead.  

“Cash is known as a defensive asset for a good reason: in times of market turmoil, it remains largely unaffected. But that advantage over growth assets like equities and property disappears over the long term,” says Tsatsi.

“As the South African Reserve Bank (SARB) looks to help consumers and businesses recover from the COVID-19 pandemic by making the cost to lend money cheaper, South African savers run the risk that the general cost of living goes up faster (known as inflation) than what cash could earn in the form of interest,” says Tsatsi.

According to research published in the Long Term Perspectives 2020, looking at 90 years of investment data — including events such as World War II and the 2008 Global Financial Crisis, cash would take 86 years to double in value as opposed to only ten years if invested in listed companies on the stock exchange, known as equities.

Graham Tucker, Portfolio Manager of the Old Mutual Balanced Fund, says that the argument in favour of investing in growth assets like equites and property are based on long-term averages. “That case only gets stronger when you consider the expected returns from these asset classes going forward.

“Despite the impact of COVID-19 on the market,  local equities are now expected to deliver 7.0% real returns and property is projected to grow 10%. These expected returns have grown steadily in recent years as valuations have moderated.

“Cash, on the other hand, is expected to deliver only 1% real return over five years, which is a deterioration on the previous projection of 2%. Whether you look at the current or previous projections, it’s clear that you need growth asssets in your portfolio if you hope to meet your long-term investment goals,” says Tucker.

Tsatsi reminds South Africans that saving alone will never result in wealth creation unless money is invested. “Saving is setting aside money to purchase something tomorrow, or next month, or next year. Investing is buying assets such as equities, bonds, and property with the expectation of

growing your real wealth over the long term,” says Tsatsi.

“The case against keeping your money in cash only gets stronger when you consider we’re expecting another rate cut this year, concludes Tsatsi.

Despite the current global turmoil brought about by COVID-19, equity markets are trading at more favourable levels and cash returns are diminishing. For aspiring investors who are prepared to take a longer-term view, several multi asset funds with exposure to equities, property and bonds could prove to be an attractive entry point into markets, pending consultation with a financial advisor.