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Cash or Shares?

Is it better to grow your wealth by investing in shares, or by putting your money into cash? History shows a diversified portfolio of Australian shares can generate far stronger returns than a cash investment – as much as 80% more since 1990

A quick look at the numbers shows that when it comes to long term returns, shares are a clear front runner over cash.

Investing is a long term process. Even a retiree aged in their sixties can’t afford to overlook the fact they could live for another 20, even 30 years, making a long term outlook essential.

But too often we fail to match our long term outlook with a long term investment. And it’s an oversight that can cost you dearly.

Cash – security equals low returns

Cash, for instance, is an excellent short term investment. You’ll earn a known return and your capital is very secure. Deposit a dollar today, and chances are, a dollar will still be there in one, two – even ten year’s time.

The trouble is, this sort of security comes at a price. With such a low level of risk involved, cash investors also earn a low return. That’s not an issue over short periods. But it becomes a snowballing problem over longer periods, and it means cash investors are denying themselves far bigger returns.

Over time the difference is significant

To see how this is the case, let’s say an investor deposits $100,000 into cash at the start of 1990. Assuming our investor reinvests any interest earnings, by the end of December 2010 that same investment could have grown to around $376,000.

However if our investor had invested the same $100,000 in a diversified portfolio of Australian shares in 1990, over the two decades since that initial investment would have grown to around $679,000.

The difference of $302,000 is extraordinary – more so because the time frame spans the Global Financial Crisis, a period that saw the Australian share market drop by 39%.

It’s hard to imagine an investor saying “no thanks” to an extra $302,000. But that’s exactly what happens when cash rather than shares dominates a long term portfolio.

Valuable capital growth

The reason shares generate a far healthier return over time is simple. Shares provide ongoing dividend income plus valuable capital growth. On the other hand, put your money in cash and your money will only earn interest – typically at a low rate.

As we’ve seen in recent years, shares can swing in value over short periods, sometimes dramatically. This is why shares are regarded as a long term asset. Indeed, the longer the investment period, the greater the chance of enjoying strong returns on shares. As a guide, over investment periods of ten years the Australian share market has never returned a negative result.

Looking at the big picture it’s clear, if you have a lengthy investment horizon, adding some shares to your portfolio will see you win out over the long term.

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