Sunday, September 9, 2007

Exploding The Cash Is Trash Myth

So, in May 1989, with the Australian share market in the depths of a bear market, and real estate has just crashed, where do you put your money? Obviously in Japan (if you belong to the Flat Earth Society, as most do, and you know nothing about the underlying mood insight of the socioeconomist).

Okay, so let's you and I invest $1,000 each in May 1989. You put yours into Japanese shares (buy the Nikkei index at 34,000) and I'll put mine in the bank. Let's assume that you have taken the advice of your broker or adviser to "buy and hold for the long term. Even if the share market falls, it will always rise to a new high in the long term."

Let's say that over the next 18 years, to May 2007, I earn 6% per annum interest. (Note that the cash rate in Australia was 18% in 1989, but I want to be generous here). Dividend yields on Japanese shares are notoriously low, and I am probably being overly generous again (by about 50%), but let's assume you earn 1% per annum in dividends on your Japanese shares. And let's say you hold your shares right through until now. That is, when the Nikkei fell below 8,000 points in 2003 you didn't sell in panic, because "shares will always rise in the long term." Let's say the Nikkei is 17,000 points today. We'll ignore tax and inflation for the purpose of this exercise (if only we could).

How do we compare? My $1,000 is today worth $2,854 with compounding interest. How did you fare?

Your shares are worth $500, but you have earned $321 in dividends, which I have compounded for the sake of the exercise.

So I put my money in the bank and made 185% profit in 18 years. You put yours into the equivalent of today's Australian share market and lost 18% in the same period. Are you still sure you want to rush back into the share market? Are you sure that cash in the bank is such a bad investment? Are you going to keep listening to the "cash is trash" merchants who are simply talking their book (vested interests)? Or will you use your neo-cortex to override your emotion?

I rest my case. Just because all the "experts" say "cash is trash" does not mean that it is. It depends what you invest. There will be a time when the share market will be a fantastic investment. At that time I will be recommending it "with my ears pinned back." Yet at that time nobody will want to touch shares. Shares will be a dirty word. Aren't humans funny creatures? The Graham Dyer Newsletter has not missed a month's publication since July 1983. His track record for forecasting is the envy of many, including the 1987 stock market crash, the demise of the Japanese economy and stock and real estate markets in the 1990s, the bull market for bonds from 1989, and the real estate boom this decade. His book is entitled: How to Profit from the Coming Great Depression. If you want to know the pitfalls of investing as well as the opportunities, Graham Dyers world class work is a must read. For more of Graham's work you can visit