During the past month investors have sold investments and moved their funds into cash following the announcement by the government to guarantee cash deposits in an attempt to allay fears from the fallout of the credit crunch. But you have to ask whether moving funds into cash is really a smart move for investors? In my opinion cash is not a good investment vehicle for building wealth, rather it is a vehicle for holding liquid assets while you wait for opportunities to invest. In my book, a good investment must deliver capital gains and income, with shares and property being the ideal investment for individuals wanting to build wealth.
Currently the inflation rate is around 5 per cent, and with cash deposits earning between 6 and 7 per cent investors are really only treading water by placing their assets in cash. If we add in the fact that investors will pay tax on the interest they earn on their cash you can see why I believe there is very little validity for considering cash as an investment. For investors with a long term view, it makes more sense to buy and hold solid blue chip shares such as Commonwealth Bank that pay a dividend yield of 6 per cent tax paid. After all, if the banks are safe enough to deposit your cash with, surely owning the bank is just as safe.
So what can we expect in the markets? November 1st was exactly one year since the all time high of 6873 points was achieved on our market, and since then it has fallen an unprecedented 3179 points or 46.25% making the past year one of the worst in history. Over this period we have had 33 weeks in which the market closed lower than it opened and if this week closes higher only 15 weeks that it has closed up, with 4 weeks closing roughly around where it opened.
This week, the market has rebounded a little over 7 per cent since forming a low on Tuesday, and although this is promising it is not enough to convince me that we have seen the long term low in our market. It is likely this is a false move up and that we will get one more move down over the next week with the market falling to a low of between 3400 and 3500 points. Once this occurs I believe the All Ordinaries Index will trade up until late January or early February 2009. A word of caution for those looking to invest and that is to only buy shares in the top 100 as these will be much safer and more profitable.
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