Ask Melanie: should I hoard my cash?

Melanie Nutbeam, a certified financial planner based in Hong Kong, addresses common personal finance queries. Send your questions to

PUBLISHED : Monday, 17 September, 2012, 12:00am
UPDATED : Monday, 17 September, 2012, 3:26pm

I hate seeing the value of my investments drop, so I've been keeping my money in cash. Is that a good strategy given there's still so much uncertainty around?

By protecting yourself from risk in one area you may unwittingly expose yourself to risk in another. Keeping cash in the bank to protect its value leaves you wide open to a more insidious risk - inflation.

Hong Kong's consumer price index (CPI) measures inflation, or the rate at which prices rise for goods and services. The composite CPI measures average spending in all households.

Food makes up nearly 28 per cent of the index and housing makes up about 32 per cent.

We all need to eat and many of us are paying for housing so, although your household spending may vary a bit from the average, the inflation rate is a great indicator of how much more of your monthly income will be needed to keep up with increases in basic spending. As inflation increases, your money will buy less of the things you need.

Inflation in Hong Kong is almost 4 per cent, so cash in the bank needs to earn the same amount to maintain its purchasing power. If not, its value is dropping, and this loss is compounded year on year as inflation continues. It's death by a thousand cuts.

Unfortunately, as your bank statements report only your cash balance and not its purchasing power relative to a year ago, nor what it's forecast to be in a year's time, this drop is less visible than a corresponding drop in the value of securities invested in bond or share markets.

Your cash in the bank feels safe, but that's false security unless you have a strategy for recovering value lost to inflation. Your choices for doing so are: negotiating a pay rise; saving more; retiring later; spending less in retirement; or investing.

Most people elect to actively invest part of their savings as, in the long run, bonds and shares outperform cash, with a bumpy ride in prices along the way.

There are three classic ways to manage the risk of investing. First, buy well-priced quality assets spread across a range of different assets and securities in different geographical regions. Secondly, buy into the markets on a regular basis so as to average the prices at which you buy. Thirdly, resist the urge to completely abandon your strategy when markets falter.

You mention your concerns about the uncertainty that's around. Uncertainty also creates some opportunities.

There are plenty of companies out there operating effectively and producing profits. Valuations for many companies appear cheap relative to forecast earnings, especially in Asia. Investing in companies that produce consumer staples or services we all use might appeal to you, as might investing in countries where demand for such consumer staples and services is strong or growing.

If you still feel queasy, a low-risk starting point might be investing in securities that are designed to simply match inflation.

You won't get ahead with these, but nor will you fall behind. The Hong Kong government iBonds, for example, are designed to match the composite CPI.

Low fee, good quality, bond funds are also available, but all come with risks attached.

Of course, some have so much money they don't have to worry about lost purchasing power at all.

If, however, you are not so rich, you will need to consider investing, or pay the price in another way.

The views presented here are general in nature. For personal finance strategies tailored to your needs you should talk to a professional planner