Why you should have property, shares and cash in your investment portfolio: Mark Bouris

Since the GFC, money has been flowing to bank deposits. That is, low-risk, low return options where the saver has an element of "government guarantee" and money is either on hand or has a fixed return for a fixed term.

The move to cash has been at the expense of investment in shares. The market capitalisation of Australian equities in June 2007 was $1.59 trillion, and by June 2012 it had fallen to $1.18 trillion.

Correspondingly, total term deposits with Australian banks equaled $196.2 billion in June 2007, rising to $533.5 billion in June 2012.

There are signs that the market is warming again to the share markets. Should you join this trend?

There are three considerations: your goals, your timeframe and your risk tolerance.

A goal – for instance, to save for retirement – will tell you how much you need to save and how much your savings must earn. Large goals need the compounding effect of high yields over the long term, whereas small goals don’t need so much planning.

Your timeframe also dictates where you put your money. Bank deposits are useful for short-term goals because they allow ready access and they are government guaranteed.

Shares favour the long term. They are a good investment for young savers or those in mid-life cycle because the performance of shares is best measured over a decade.

This is where appetite for risk comes in. Over the past decade, Australian shares returned 9.1%, compared with the performance of cash at 5.4%.

However, in any year – or any week – of the 10-year performance of shares, the value of what you own can fluctuate, sometimes wildly. So you need to weather the ups and downs over a long cycle in order to get your 9%.

If your retirement falls in a month where the share market takes a significant downturn, and you rely on shares, you’ll have to wait for a market correction.

This is not an either/or argument. Strong investment portfolios are diversified, and operate as a matrix in how they deal with goals, timeframes and risk appetite. This usually means they have a mix of cash, shares, property and bonds.

Younger people aiming for a large retirement nest egg should weight their investments towards equities and property, and those approaching retirement should favour having a paid-out property and a weighting to cash investments because they don’t have the time to reverse any losses on shares.

One of the warnings I would give to those who want to shut out all risk, is that economies change and so do opportunities. My team at YBR is currently concerned about the chance that long-term interest rates will rise over the next two years, caused by economic growth and a return to consumer confidence.

If this happens, how many conservative investors will have money locked away in fixed-rate bonds? They’ll be losing out while owners of shares, bank deposits and floating rate bonds enjoy higher interest rates as economies expand.

Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance.