MONEY - the true value!!

Did you know that Irish households have in excess of €100bn sitting in cash! What's more this figure is set to rise with in the order of €12.2bn being saved each year. (Source : CSO 2011)

 These are startling statistics but not all together surprising when you consider the economic downturn and global financial crisis of 2008 and peoples need to find safer investment vehicles, cash became KING!

If you consider 15 September 2008 was Black Monday when Lehman Brothers defaulted and the crisis started the repercussions of which were felt across the entire global financial markets. So much so that the S&P 500 Index hit an all time low of 666 on 6 March 2009 however in 6 months on 1 September 2009 it had rallied and recouped 50% to 999 and by 17 February 2011 it had doubled to 1,333 i.e. a full 100% recovery within 24 months!

There was plenty of merit to be in cash during 2009 and 2010 as real returns of 8% were achieved. Consumer prices fell by an average of 4.5% in 2009 and with deposit rates running at 3% to 4% meant that the real return for sitting in cash in 2009 was in the order of 8%. A very attractive proposition for the risk adverse Irish saver! However this type of real return is an exception rather than a rule and it's unlikely to be repeated again! 

However, money is not what it used to be! Consider that ..... a litre of diesel up 94% since 1990 .... rashers up 66% and ...... most shockingly of all, a pint of stout is up 108% in 20 years. (Source: CSO 2011)

The reduced purchasing power of a €uro today is all down to inflation and the only meaningful way to protect against rising inflation is by investing in real financial assets! The impact of rising inflation year after year significantly erodes the purchasing power of money! Consequently while staying in cash might be a good decision in the short term, longer term it becomes an increasingly risky proposition.

This all being said, don't for one minute think that I am advocating moving completely out of cash into stock market related funds or the like!! I am however suggesting that with the right advice a more measured approach has to be considered to ensure that inflation does not continue to erode the value or purchasing power of money.

The following financial episodes in different era's paint an interesting picture.......

1. 1929: the great depression
Length of bear market: 31 months
Amount lost: 85%
Full recovery: 262 months

2. 1973-1974: oil crisis
Length of bear market: 11 months
Amount lost: 44%
Full recovery: 64 months

3. 2000-03: dot.com crash and 9/11 attacks
Length of bear market: 25 months
Amount lost: 49%
Full recovery: 56 months

4. 2007-09: global financial crisis
Length of bear market: 18 months
Amount lost: 57%
Full recovery: markets yet to recover from last peak

However, investors had plenty to be positive about in February
- markets continued their upward trajectory, with Wall Street having its best start to the year in more than 15 years. This was lead by the technology heavy NASDAQ which touched the 3,000 mark towards the end of the month. This level was last seen in 2000. (Source: The FT, 5 March 2012)
- confidence in the eurozone increased with yields on 10-year Italian debt falling to 4.99% and Spanish yields falling to 4.89%, their lowest rate since August '11. (Source: The FT, 5 March 2012)

Light at the end of the tunnel? With inflation risks mounting and other asset classes continuing to outperform, a shift to real financial assets may be warranted! Food for thought don't you think!

Please have a look at the other services we have to offer or feel free to contact Alasdair directly on 01 810 1912 or via info@agsfinancial.ie