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It's My Money with Aidan Freswick · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  This edition of It's My Money is brought to you by Brenthurst Wealth, your partner
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  for global wealth creation.
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  Welcome to It's My Money.
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  It's My Money is brought to you by Brenthurst Wealth, South Africa's
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  multi-award winning boutique wealth manager.
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  This week I'm speaking to Aidan Freswick in the Cape Town office.
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  And there's a piece on Biz News that says the following.
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  This is the headline.
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  The hidden risk of playing it safe with your money.
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  Now Aidan, this is particularly pertinent at the moment because it's a perceived
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  risky
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  environment with the war on Iran by the US and Israel.
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  And when people see risk and headlines of risk and horrible images on television,
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  they immediately run to the safety of money market and cash and other perceived
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  safe instruments, don't they?
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  Good afternoon, Lindsay.
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  and Welcome to your listeners as well.
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  Thank you.
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  We definitely have those conversations on a day-to-day basis with clients,
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  especially now.
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  And as you've pointed out, with many of the news headlines could obviously be a
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  bit alarming for investors.
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  And as you point out, money market and fixed deposits normally are sort of the
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  go-to in these times.
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  But, you know, generally it's because they feel quite secure that their investment
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  account or their, you know,
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  the account balance does not fluctuate.
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  with markets and not exposed to any, I would say, geopolitical factors or
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  anything out there.
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  So generally, money market has been a good place to hide in terms of guaranteeing a
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  safety net.
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  But at the end of the day, you know,
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  what I want to unpack is that money market should not be a long-term investment
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  solution, really,
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  because there's a number of factors which we will unpack, especially inflation and
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  income tax.
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  So yeah, I'd like to unpack a couple of those points as well.
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  Yeah, let's do that.
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  And before we get into it, we have to say that we've got nothing against or you've
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  got nothing against
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  money market and cash as part of a diversified balance portfolio.
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  It does have its role, but it shouldn't be the go to is I think is what is going to
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  come out during this podcast.
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  Anyway, that's the sort of disclaimer right up front.
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  Now, you start with the difference between capital safety and purchasing power.
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  What do you mean by that?
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  Sure, so...
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  There are two sides to this.
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  So money market accounts definitely provide the safety net for individuals
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  that want to protect their
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  capital and not expose the amount to any market volatility or any
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  potential risks that could devalue the investment account, for example.
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  But on the other hand, we've got a scenario of the inflation, the rate of
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  inflation.
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  that we need to measure these returns by.
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  So on the other hand, money market gives the safety net by guaranteeing a certain
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  outcome of the investment.
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  Let's call it seven or seven and a half percent will be guaranteed if you invest
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  in the money market account.
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  But at the end of the day, inflation is very slowly eroding the purchasing power
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  of your funds or
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  investors' funds, call it that.
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  Now, what we see on the headlines is that inflation is maybe three or four maybe
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  4.5%,
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  and the returns of money market are maybe around 7, 7.5%.
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  But at the end of the day, the real inflation,
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  the one that you and I as a consumer actually experience on a day-to-day basis
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  is a lot higher than
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  4%, especially the inflation.
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  So rising costs like education and especially medical aid,
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  medical aid probably rises close to 7 or 8% per annum.
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  So arguably, Inflation is...
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  definitely a lot higher than four, four and a half percent.
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  Now, if you take that against your returns of money market,
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  you're actually eroding the purchasing power of your capital very slowly because
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  you can't really see the impact of
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  inflation against your money market returns unless you really dig deep and do
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  the analysis.
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  But that's what I meant about the difference between the capital safety and
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  the purchasing power, that inflation really,
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  really does erode purchasing power of your capital and One needs to look a bit
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  further and, you know,
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  especially if you have funds that are earmarked for long-term investments,
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  especially for retirement, call it that.
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  We need to then look at alternatives to try and keep up with the rising cost of
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  living and
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  to sort of better position the investor to provide for the rising cost and especially
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  to keep up with the cost of living at a future date, especially over the long
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  term.
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  And that's what's meant.
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  by the difference between capital safety and purchasing power.
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  And you've mentioned inflation a couple of times.
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  Inflation is a tax.
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  Inflation is the enemy to an investor.
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  And often when you see the South African Reserve Bank gleefully coming out and
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  saying that the inflation
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  rate is 3.1% or something, you say, wait a second, I'm just looking at my bills from
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  last year compared to this year.
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  And that's because your basket is very different to the South African Reserve
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  Bank's inflation basket.
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  Your basket of goods is different.
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  Everybody's is different.
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  If you're a low-income or a high-income person, there's a great difference between
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  the amount that you spend on shelter and
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  energy as a percentage.
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  And so it goes on.
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  And so it goes on as well when it comes to another thing that you must look at when
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  you're seeking to flee to safety, so-called,
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  and money market rates.
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  And that is interest rates because, for example, this week, Aidan, I don't know if
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  you know,
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  but there are eight central banks making decisions on the price of money.
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  i.e.
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  interest rates.
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  And if they cut interest rates, that cuts your return if you're in cash or if you're
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  in the money market, doesn't it?
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  That's right.
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  And obviously, you know, the interest rate expectations might be a little bit
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  different now with the ongoing
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  war and the oil price especially.
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  But generally, the interest rates are due to come down, you know, very slowly or
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  aggressively,
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  depending on what the Reserve Bank ultimately votes on.
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  So if you look at the interest rates and let's assume
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  the interest rates are expected to decrease immediately will impact the
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  returns of money market
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  because money market returns are directly related to the interest rates that are
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  prescribed by the reserve
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  bank but maybe just another thought is that let's
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  assume you are a high income taxpayer now we mentioned inflation that actually
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  erodes the purchasing power and also erodes the returns profile but if you
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  haven't
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  spoken about tax and taxes is probably the biggest elephant in the room and I'll tell
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  you why.
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  If you are on the higher end of the tax paying bracket, if you're fortunate enough
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  to be there,
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  then it means that because SARS doesn't allow for much of an exemption for
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  interest income,
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  you're going to be paying tax on the interest that you earn at your marginal
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  tax rate.
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  So if on the 45% tax brackets.
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  It means you automatically need to deduct 45% from the returns that you're getting,
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  which means that you definitely are eroding the purchasing power of your
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  capital.
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  But to your first point, there is a role for money market in an overall diversified
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  portfolio,
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  especially with short-term needs.
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  I would say anything between six months and 12 months would be an appropriate time
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  frame to keep some funds in money market,
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  but anything longer than that.
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  One would need to seek appropriate advice to get alternatives,
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  especially for tax efficiency and to also protect the purchasing power against the
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  impact of inflation.
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  Right.
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  Let's get down to the cold hard facts now.
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  We've talked about theory.
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  We've talked about the various things that can erode your safe investment.
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  But what does long term data tell us?
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  I mean, what are the simple facts of being in, for example, a money market fund
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  versus being in something slightly more?
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  speculative, shall we say.
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  I've got a lovely graph in front of me that you sent me, but it's very difficult
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  to describe on a podcast, but you've got the job of doing that.
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  What are the long-term data points that you want to point out?
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  Sure.
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  So there are different asset classes out there that are available to investors to
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  actually invest in,
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  but generally over the long-term, and especially for long-term investors that
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  are willing to
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  commit to markets and ignore the headlines and stick to the overall financial plan
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  that was devised for them is that
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  generally equities over the long term have handsomely outperformed money market.
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  However, one doesn't need to be invested completely in equities.
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  We can build a very balanced and diversified portfolio consisting of
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  multiple asset
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  classes, including cash and money market for safety reasons.
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  So generally, you know, if you have a balanced portfolio consisting of cash,
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  bonds,
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  properties and equities, you will almost be certain that going forward and over the
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  long run,
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  it will outperform your money market returns over those periods.
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  However, like I've mentioned, and also a little bit of a disclaimer is that over 12
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  months or anything shorter
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  than 12 months would have an ideal place for money market, but anything longer than
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  that.
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  Investors should consider alternatives and seek appropriate advice because advisors
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  have the ability.
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  and knowledge to construct diversified portfolios according to the needs and
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  future needs
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  of any investor out there.
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  Yeah, and you talk about the volatility of asset classes like equities, for example,
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  and a great example of that was Liberation Day in April of 2025.
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  Plus, of course, the war that I mentioned in my introduction hasn't been such a
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  volatile period, only for the oil price,
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  not so much for equities.
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  But the point is that they are more volatile than the money markets and
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  equities, that is.
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  So the right role for money markets, as you say, is over a 12-month period,
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  potentially,
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  and in a diversified portfolio.
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  And that's key, isn't it?
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  It's got its place, a small percentage, as long as the rest of the portfolio is
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  diversified, Aidan.
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  That's correct.
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  The correct place for money market is really just for short-term needs and also
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  for a need that
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  when you need to access the funds that the value does not become less than what
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  you've put away.
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  For example, if you need to purchase a property and you need a certain amount for
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  the deposit,
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  you cannot actually have the risk of the capital being slightly below value or
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  slightly below the
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  amount that you've saved up towards because the deposit on a home is an exact
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  amount that you need.
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  In those cases, or even if you want to buy a vehicle,
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  or if you're saving up for your emergency fund to supplement your income in case
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  there are rainy days,
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  those type of scenarios would be the ideal place and the role for money markets.
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  But as you've pointed out, long-term investors definitely need to seek
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  alternatives,
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  especially in the rising inflation environment and also in an environment
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  where interest rates are potentially coming down.
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  You sum up your article by saying protecting your future purchasing power.
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  This is interesting, interesting take on it, because you say ultimately, investing
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  isn't just about protecting the value of your capital today.
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  It's about protecting the lifestyle that capital must support tomorrow.
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  So if, for example, you're not keeping up with inflation because you are playing it
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  safe, then tomorrow doesn't look good.
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  Never mind today.
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  Tomorrow suddenly looks even worse because there's more erosion.
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  And the other thing that I want you to mention as well, if possible, Aidan,
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  is there's a misconception that when you become older, that means that you take on
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  less risk.
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  Sometimes it's appropriate, but often it's not.
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  I don't think age has much to do with it these days.
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  Not at all.
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  I mean, we will, of course, look at a scenario and see and evaluate how much
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  risk the investor is willing to
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  take.
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  But sometimes there is the scenario where calculated risk needs to be taken
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  in order to achieve a certain outcome.
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  And what I mean by that is, for example,
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  if the investor maybe doesn't have enough capital to survive over the amount of time
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  that they need,
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  we might need to take on a little bit more risk in order to give the investor a
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  better chance of achieving their outcome
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  over the long term.
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  And that's just one of the, I would say, scenarios of where we need to actually
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  increase the risk profile of the client
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  and not necessarily factor in the age, but factor in.
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  the investment needs of the investor, especially if they need to achieve a
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  certain outcome at a particular time,
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  we might need to take on a little bit more risk than what typically would have been
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  the case if there was maybe
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  a surplus amount of capital available.
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  But it all depends and it's always going to come down to the needs of the investor
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  and that's how we give our
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  financial advice to our clients.
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  Exactly.
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  So if you're in doubt, if you think you're playing it too safe, or if you think even
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  you're playing it a little bit too close to the wind,
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  then speak to your financial advisor.
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  Aidan Freswick is from Brentos Wealth, and that was It's My Money.
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  It's My Money was brought to you by Brentos Wealth, an award-winning boutique
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  wealth management company.