Caroline Ritchie: Don't let past errors hinder your future

Ever found yourself trying to make a leap of faith to commit to something but failing because your past kept scaring the pants off you? Then kicking yourself because your rational brain knows exactly how good the missed opportunity was? Happens occasionally in human-to-human relationships but all day long in investing.
Let's take a pressing issue for a number of investors - a high proportion of your net wealth sitting in the bank in cash. Either on-call, in savings accounts or in term deposits. While business confidence is supposedly at an all-time high, investor confidence over the last few years has yet to match it. We can't deny that Kiwi investors have taken a bit of a scraping but instead of getting back up, dusting ourselves off and carrying on, there has been a large retrenchment back to the safety of the bank. Understandable, really, given the finance company and mortgage trust wreckage.
And yet, still, the logical investor with a high proportion of cash at the bank at current rates must know that they are losing. Every day that your money sits earning interest at 4 per cent, you lose. Inflation is currently 4 per cent. Then deduct resident withholding tax and account fees. In fact I'm so keen to show you, let's do a sum. Very simplistically, for $10,000 invested now at a nominal rate of 4 per cent per annum (using simple interest paid at maturity for this is often all you get), in 12 months, (using $5 a month account fee, RWT at 30 per cent and inflation as above), your stash will be worth $9120. Your real rate of return is minus 1.8 per cent. Great.
Sitting on pure cash is a strategy employed by nearly every fund manager during his or her duration, but overwhelmingly for limited periods and in small or moderate proportion to the total invested. Keeping your fists full of dollars over the long term may make you nominally rich but real-return poor because this will not, over time, keep up with inflation. There is a great swathe of investors out there sitting on cash, chewing pencils, knowing that they are losing, (safely losing, I'll admit, but it's still losing), but still too numbed by the past to get out and look at other options. The alternatives in some cases may be unfamiliar; corporate bonds, listed property, shares, offshore investments, commodities indexes. A small amount of research and a cursory use of the logical brain tells us that these things, over the long term, not only keep up with inflation, they kick it for touch. Being properly selected and researched by a team of experts increases the chances of success and enhances the return further. Every single person who was advised to increase their equity quotient during the dark days between the end of 2007 and the start of 2009, and who didn't, is kicking themselves because they know how good it could have all been. Yes - it would have taken a step into higher risk territory. But investing is just like life, after all.
Caroline Ritchie is an investment adviser with Forsyth Barr in Napier. She can be contacted on 0800 367 227 or caroline.ritchie@forsythbarr.co.nz.
Her disclosure statement is available on request and free of charge. This column is general in nature and should not be regarded as personalised investment advice.