The New Zealand media is full of royalty news at the moment. Prince William is due to visit next year, the King of Rock’s death and funeral have caused a frenzy for global media and Lord Ted’s reappointment to the All Black throne have ensured that kings past, present and future are dominating the headlines.
The business headlines are also full of news about another King, Allan Hubbard and South Canterbury Finance. Standard and Poors are making noises about possibly downgrading SCF‘s rating due to (among other things) a lowering of cash reserves in South Canterbury’s Balance Sheet. However, S&P see Allan standing behind SCF as an enormous positive. Allan’s personal commitment to SCF should see his company weather this storm and continue its proud 83 year heritage. What a shame others in his position did not do the same in recent months?
During tight economic times, “cash is king.” Holding enough cash on hand to fund day-to-day activities is crucial if banks and suppliers are to be comfortable and supportive. While making a profit is vital, without cash, profit may not add up to much. Current commitments are not paid from last year’s profits, but from tomorrow’s cash flow which means that business owners must know their revenues, expenses, creditors and debtors like a favourite pair of slippers.
If you are being used as a bank overdraft then the risk is that you will be unable to pay your creditors, the IRD or your employees causing catastrophic results. At Searell and Co, we can assist with
enhancing and understanding your cash flow,
putting in place robust and profitable processes and,
maintaining open relationships with key partners.
These are crucial strategies in business mentoring which is becoming an accepted part of today’s economic landscape. One of the basic principals remain very simple; Cash is King. Keep cash flowing and you should be OK – turn the tap off and your reign as a viable business may be limited.
Can the same rule be applied in the investment world? Is Cash the King of the Investment Kingdom?”
Being “in cash” in recent months has been both an understandable and a winning strategy. Uncertainty and volatility, together with the Retail Deposit Guarantee Scheme have caused a “flight to safety” over the past 12 months the likes of which we have not seen for generations – if ever! Cash has been a good “parking space” for a while but it remains a bad option for the long-term.
Cash must form a part of any effective investment plan – you still need to pay the bills. I also concede that for the risk averse, cash has been, and may remain, effective. However, if your whole portfolio is in cash, and it stays there, you will not need to rely on collapsed finance companies and PONZI schemes to erode your wealth – time and inflation will do that for you without you even knowing about it.
Most commentators are now saying that it is only a matter of time before inflation becomes a big issue. The suggestions to protect against the effects of inflation vary from buying shares and gold, launching (back) into property, investing in fine art and antiques and even buying Michael Jackson memorabilia. I cannot say with any conviction that an oil painting or a collection of Jacko’s records will provide for your retirement but one thing is clear – the variety of suggestions from a range of experts all indicate that staying in one asset class is not going to work in the long-term.
Cash is an “asset class.”
While investing is not a gamble, there is always a degree of uncertainty about investment and uncertainty is just another name for risk. In investment, “risk” means “the chance that an investment's actual return will be different than expected”. However, without risk, there can be no return – or at least no return that will protect you against the effects of inflation and provide for you in the medium to long-term. However, risk or uncertainty need not imply a gamble.
What needs to be understood is that a greater return should be expected if a greater risk is assumed and risk is more easily assumed when it is accompanied with understanding.
We all understand the risk free aspect of cash and government bonds, but advice can help you understand your options beyond this asset class. This understanding should assist you in creating wealth and avoiding the worst effects of long-term inflation.
I admit that cash must form part of your investment portfolio. However, rather than cash being your investing King, it should be just one card in your hand and not the only card you can put on the table. After all, a pair of twos will beat a king every day of the week apparently – but then I wouldn’t know – I’m not a gambler, not with my money and certainly not with anyone else’s!
Peter Curnowis an Adviser with Searells Financial Services Limited, a part of Searell and Co Limited – Accountants and Business Advisers. A copy of his Adviser Disclosure is available free of charge upon request and can be viewed at www.searells.co.nz
This article is general in nature and should not be regarded as specific investment advice.
