When spending is the best form of investment

Wafer-thin yields, negative interest on deposits, banks as reliable as Cyprus. Let’s avoid all the worry, and just spend it, or give it away. Surely it makes better sense.

PUBLISHED : Wednesday, 10 August, 2016, 8:42am
UPDATED : Wednesday, 10 August, 2016, 10:43pm

The carry trade is a dangerous thing. It sucks you in by promising to swap volatile returns for a steady yield. Steady yields are now so low that almost anything above zero looks good.

But those steady return opportunities are becoming a very crowded trade, and popular trades usually end in tears.

Conservative investors count on the bond market for yield; invest in bonds, clip the coupon, and get your money back at maturity. But coupons are now thinner than the paper they are printed on.

While investors have chased down bond yields, they have also priced up equities and invested in expensive, ill-performing hedge funds.

They have been burnt in volatile commodities, bid up urban real estate, and invested in real businesses that probably don’t need any more cash.

True alternatives, like art, rare vintage cars and wine, are a gamble; a flutter that might pay off - and if not, an enjoyable indulgence.

For cash in the bank produces nothing and indeed it cannot be long before many bank deposits will “pay” a negative interest rate. A third of developed world government bonds now yield less than zero.

If my portfolio of risky Asian shares goes down, I might lose 50 per cent but if a bank goes under, I lose all my cash.

This may well last for a while but it is unsustainable within our current economic system.

Nor is cash in the bank that safe; something I found out when Barings Bank went bust in 1995 holding what was thought to be the secure deposits of many conservative people.

It made me realise the true risks of having cash in the bank. If my portfolio of risky Asian shares goes down, I might lose 50 per cent but if a bank goes under, I lose all my cash.

Perhaps more worrying is the Cyprus solution to their 2012 financial crisis where the banks failed to such an extent that the country was unable to bail them out. So it became a “bail-in”.

In return for financial support from the Troika (the IMF, ECB and European Commission), a “bank deposit levy” of as much as 48 per cent was required to be taken off the top of everyone’s bank account above 100,000. Wise savers paid for the profligacy of the foolish borrowers.

There is nothing so annoying in a bear market, or a Cyprus Solution, than looking at one’s losses and imagining what one could have done with the money.

They do say that you can’t take it with you, so if you are not part of the “one who dies richest, wins” club, you can always allocate some of your investable cash to disposing of it before the market takes it away.

This can be done through philanthropy, which requires just as much professional thought as an investment strategy – it is the other side of the coin.

The risk return relationship is similar, albeit with different and more difficult to measure outcomes, including the satisfaction of having done the right thing.

Bill Gates and Warren Buffet have been two excellent advocates of philanthropy with the Gates Foundation giving and investing billions in the production of vaccines.

Something of such productivity to mankind is a most clever way of getting a big bang for your buck.

You might as well spend it now to give you a more comfortable life and lasting memories

It doesn’t matter how much or how little money you have, there is always someone worse off than you. A recent picture showing a happy little African girl in a printed dress from an adoption advocate made this clear - out of her sleeves stood stumps for arms.

Just as valid an investment strategy, which also has robust economic utility, is to spend it.

Naturally discretion is required to make sure that you still have enough to live on before the Grim Reaper arrives, but there is a balance between making it and spending it that Hong Kong people don’t easily find.

Perhaps you can afford to retire? Take a gap year? Or is it time to renovate the apartment, buy that drop-dead car, have that hip operation, write that book, study, or trek to Everest base camp, in Patagonia, or up Kilimanjaro.

This is not profligate, just common sense. For if you are called to pay someone else’s debt, you won’t have that cash. So you might as well spend it now to give you a more comfortable life and lasting memories.

And remember the economics of consumer spending, that the more you spend, the more you will help the economy – doing your bit to defer the next economic recession.

Richard Harris is chief executive of Port Shelter Investment Management. www.portshelter.com