CASH....the riskiest investment
Cash has traditionally been considered a safe investment as it provides relatively consistent returns and protects capital. However, from a retirement portfolio or pension perspective, cash is anything but safe.
Cash is risky because its purchasing power is eroded by inflation. Retirement funds should avoid holding cash over the long-term because its returns will seldom outperform inflation, particularly in the current low interest rate environment.
Yes, the capital amount will never disappear, its nominal value will always remain, but its real value and the real value of the interest it earns after DIRT will become less over time as inflation drives costs up and erodes the value of that cash.
In the traditional retirement fund space cash has been considered a low-risk asset, with corresponding low levels of return. Then, as you get increasing levels of volatility so you are likely to experience increasing levels of returns until you get to equities as the highest volatility but corresponding one of the highest potential returns of all the asset classes.
Instead of looking at return profiles in the nominal space, they should be viewed in the real space, with inflation factored in, and in relation to the liability profile of a pension fund. Looked at this way, cash becomes inefficient-it's no longer the lowest risk, lowest return asset class. In fact, the risk level of cash increases while still offering low and sometimes negative real returns depending on inflation.
Over the long-term, income preservation should be top of mind when putting together a pension fund investment portfolio and strategy. Focusing on income preservation means focusing on 3 main risks to members' income and its purchasing power: namely INTEREST RATES, INFLATION and LONGEVITY!
Accordingly focusing on income preservation, as opposed to capital protection, means looking carefully at alternatives to cash.
From a liquidity point of view; retirement funds are likely to hold some cash but this should be kept to a minimum required to meet the monthly liquidity needs of the portfolio. A portfolio that is positioned to adequately deal with the requirements of retirement fund members will include exposure to growth assets that are able to deliver returns that at least keep pace with inflation such as equities and inflation-linked bonds.
Retirement funds holding inflation-linked bonds will see some capital depreciation and appreciation over time with the price of bonds fluctuating, but the coupons included in inflation-linked bonds are steadily increasing at the rate of inflation.
Inflation-linked bonds have a coupon growth that is linked to inflation. This means that as an investor you'll have an income stream that actually has a link to inflation.
Can you afford to leave your future to chance? Please complete the attached enquiry form or contact Alasdair directly on 01-810 1912 or via info@agsfinancial.ie and he will happily create a retirement plan for you or review your existing retirement road map.