Once upon a time, in the days before computers and credit default swaps, savvy old investors made their decisions on one over-riding consideration. Is it a bull, or a bear market?
Whether you are saving to buy a house, motor vehicle, investment property or making provision for your retirement, this question remains relevant if you wish to improve your returns.
Let me explain:
In a bear market cash is king, as is often said. It is the cashed-up investor who is able to exploit a falling market by acquiring undervalued assets, when others have to sell to de-leverage and de-risk their asset portfolios.
Furthermore, in a bear market the erosive effect of inflation is less severe; indeed the spending power of savings will be greater if deflation supervenes.
In a bull market cash is an under-performing asset. Bank interest is paltry, and the return is less after taxation and with rising inflation. It is time to reduce cash holdings, and to increase gearing to acquire assets.
Borrowing is doubly beneficial:
- the value of the principal is reduced by inflation
- the asset acquired increases in value with inflation
Success in meeting savings goals such as for superannuation depends on early recognition of the mood of the market, and adapting one’s strategy to changing circumstances. The smart investor will move to cash and liquid assets when the market becomes over-heated. forming a “bubble”; and will borrow to acquire liquid income generating assets when opportunity presents.
In the long run it is more important to avoid loss of capital, than to meet the highest return. Be risk-averse with your super savings. Never squander your capital by spending it, or risking it on uncertain schemes. It is capital that counts. Keep it growing.