Cashed-up – and ready to strike back

FOUR. Carefully compare interest rates

Horrocks says members of self-managed funds can chase down the most acceptable cash and term-deposit rates from quality institutions. Generally, he suggests staying away from cash management trusts to hold your cash as their rates are not extremely competitive.

An excellent place to begin your interest-rate comparisons is on the websites of banking product researchers Canstar Cannex and InfoChoice. Note that some of the rates shown include bonus interest with conditions applying.

Superannuation fund researcher SuperRatings reports that the median cash return (after fees and taxes) for industry funds in February alone was 0.24%.

FIVE. Drip-feed your market comeback

Horrocks warns against timing the market. In other words, don’t try to pick the bottom of the market. The professionals inevitably get it wrong and the rest of us haven’t a chance unless we strike it lucky.

“We may well be getting close to the bottom,” Horrocks says. “But you’ll never know the best time to invest.”

His general advice is to drip-feed whatever cash you wish to invest back into the market over perhaps a 12-month or longer period. You may decide to invest an equal proportion of your cash every month or every quarter.

In this way, you are attempting to protect yourself from buying in a short-term rally and, hopefully, will buy some of your shares during troughs. Another term for this process is, of course, dollar-cost-averaging.

SIX. Don’t indulge in stock-picking

The idea of reinvesting large chunks of cash back into the market in just a few stocks that you or your broker hope will be winners is almost a sure way of losing money. One of Australia’s most experienced and respected investment advisers (not Graham Horrocks) told me that he had given up on stock-picking because he only seemed to lose money.

Horrocks suggests that a smart way to go if you are investing in a self-managed fund (or in your own name) is to put your money into a widely diversified and low-cost index fund, listed investment company or an exchange traded fund (EFT). An index fund tracks the performance of a selected market such as the S&P/ASX200. And an exchange traded fund is basically a listed index fund.

Listed investment companies can hold huge portfolios of stocks yet are not designed to replicate the returns of a particular index. For instance, the Australian Foundation is Australia’s largest listed investment company, holding 100 stocks and with a management expense ratio (MER) of just 0.14% for 2007-08. And Argo Investments is another giant listed investment company with about 180 stocks in its portfolio. (They are mentioned not as an endorsement, merely examples.)

SEVEN. Hold some of your reserves in fixed interest

If you intend to drip-feed your comeback into the market over at least 12 months, Horrocks suggests that some of your reserves should be held in fixed-term deposits where the rates are likely to be higher. Again check the websites of Canstar Cannex and InfoChoice.