Is Cash King? Deciphering Investment Potential

Is Cash King?

In the current financial climate, a 5.5% annual interest rate over 5 years with a cumulative return of 30.7% is undeniably alluring, but has a major drawback of reduced liquidity. Conversely, investing in equity offers the potential for higher returns despite being exposed to higher risk. If we look into the historical data of the Timeline Tracker portfolios, ranging from 0 to 100, each portfolio represents a unique combination of equity and fixed income, offering readers a spectrum of risk and return options. The data goes back to January 2010 for Tracker 100 and January 2014 for the other portfolios until Dec 2023 respectively.

Our analysis extended across daily and monthly scenarios for each portfolio, tracking their performance over a significant timeframe. The portfolios are structured to accommodate different risk appetites, with Tracker 0 being the most conservative (0% equity, 100% fixed income) and Tracker 100 representing the most aggressive (100% equity, 0% fixed income).

The results showcase the diverse performance of each portfolio. Tracker 60, with its 60% equity allocation, consistently outperformed the fixed-term deposit’s cumulative return of 30.7%. Interestingly, the daily scenarios indicate that the higher equity portfolios (Trackers 80, 90, and 100) almost always exceeded this threshold, underlining the potential benefits of a more aggressive investment approach.

It’s also crucial to ground our analysis in the real-world context. Since 2014, the anticipated 5.5% annual return on fixed-term deposits, yielding a cumulative return of 30.7% over five years, hasn’t been the norm. In reality, bank deposits have faced a more subdued performance. This realisation adds a layer of complexity to our findings, suggesting that the outperformance of the Tracker portfolios with a higher equity allocation may be more optimistic; while the Tracker ranges with lower equity allocation may be more pessimistic than initially perceived.

Key Takeaways:

Diversification Matters

Portfolios with a balanced mix of equity and fixed income, such as Tracker 60, present a compelling case for consistent outperformance.

Risk-Return Tradeoff

The higher-risk portfolios (Trackers 80, 90, and 100) tend to yield substantial returns, affirming the classic risk-return trade-off in investment.

Monthly vs. Daily Trends

Monthly scenarios often mirror daily trends, providing investors with insights into the stability and consistency of portfolio performance over both short and extended periods.

Conclusion

While the allure of fixed-term deposits is understandable, investors should carefully weigh the trade-offs between stability and growth. Stability and the potential for significant returns over the course of the long term.

A report by Noah Nandi, Quantitative Analyst at Timeline.