Late last year it was hard to avoid the media frenzy around the Federal Government’s guarantee on cash products and I observed the commentary with disbelief. The public debate was fixated on which companies would offer government-guaranteed products, which ones would pass on the cost of the guarantee to customers and whether or not customers could get access to the guarantee for free if they split their money among several different accounts.

However, no-one seemed to ask the most important question, which is: beyond bringing Australia into line with actions taken by governments around the world, what value was there for a customer with more than $1 million who would pay an additional 70 basis points for the guarantee on a low-risk, low-return cash product? The Government did not introduce the guarantee because it was worried about the stability or security of Australia’s banking system, which is strong and performing well. Cash products have operated effectively in Australia for decades and there is no reason why this would not continue. Unfortunately, these vital facts were missing from much of the public discussion around this issue, which seemed to be stuck at a product level rather than being focused on whether or not chasing the guarantee made sense.

The issue when it comes to cash investing is not whether the product is covered by the government guarantee, but rather whether bailing out of a long-term investment strategy and moving into cash makes sense. Government guarantee or no government guarantee, cash never, repeat, never, builds long-term wealth.

We now know that if you were going to switch to cash, the time to do it was around 14 months ago – wisdom that comes only with a crystal ball or the power of hindsight. Switching to cash today will result in two outcomes:

1. Crystallisation of losses in the equity portfolio as investors convert paper losses into real losses; and
2. Investors may miss out on the rebound in equity markets when it occurs.

On this second point, let’s be clear about this: businesses build long-term wealth and so even if investors managed to time their exit from the sharemarket correctly, they are still going to have to get back in at some point. Getting these timing calls consistently correct is extremely difficult for even the world’s best investors.

In times like these, the value of advice is proven day in, day out. Advisers who have helped their clients stay true to their long-term investment strategies, ignore the hysteria and prevent them from crystallising losses by switching to cash have served their clients extremely well. In the past few months this advice could be judged to have cost investors in the short term. However, in the long term, I believe it will be proven to be the right advice because the markets will recover and when the pick-up comes, it will come quickly and those invested in cash will miss out.

At the end of the day, investors need to look at the stability and security of the company that is managing their investments, whether they be invested in cash, equities, property or any other asset class, and not just at whether or not they are invested in a product covered by the government guarantee.

The market has fallen 50 per cent in the past 12 months – investors have every right to be worried and nervous, but for investors with a long-term investment horizon, history has repeatedly shown that staying invested in equities will deliver a better long-term return than investing in cash.

As an industry, our job is to not only make sure our clients’ portfolios are set and well diversified across asset classes, but also to help our clients not jump out of the market at the wrong time. I hope the silver lining of this financial crisis will be that after it’s all over, there will be thousands of fantastic examples of how financial advice has helped clients stay calm and protect their wealth through these difficult times.

A similar article written by MLC CEO Steve Tucker appeared in IFA magazine, Issue 439, December 15-21 2008, p24.