My 2 Cents:
Csh is Not Always King

          In a turbulent period that we are in now, the old saying that often comes to mind is “Cash is King” i.e. seeking shelter in the form of bank deposits amid stock market gyrations. The question that everyone should be asking himself or herself is “How Often is Cash King?” The answer may take everyone by surprise. As a relatively low-risk investment, cash historically has provided relative low returns. During the past 30 years in the US, cash returns 6%, just about outpaced inflation (4%) but were surpassed by the returns from stocks (13%) and bonds (9%).

         In fact, cash has underperformed stocks and bonds the majority of the time during the past 30 years from 1976-2006. (Please see Chart 1 below). The chart below shows percent of rolling 12-month periods on a monthly basis from 1976-2006 that cash (US 30-Day T-Bill) outperformed stocks (S&P 500 Index) and bonds (Lehman Aggregate Bond Index). During the period under review, there were three major findings:-

Stocks performed better than cash on a one-year basis roughly 72% of the time.

Chart 1

Investment Implications

So what does all this mean to your portfolio? A certain amount of cash is generally recommended in a portfolio for short-term needs, liquidity and reduced volatility. However, investors should be aware that allocating too much of a portfolio to cash can potentially result in significantly lower returns over longer periods of time. With historical odds of just more than 1 in 10 that cash will produce superior returns to stocks and bonds, investors should be careful about over-allocating to cash at the expense of the other major asset classes such as stocks, bonds and commodities.

Additionally, bonds and cash investments entail greater inflation risk, or the risk that the return of an investment will not keep up with the increases in the prices of goods and services. This is especially true now that the current inflation rate as measured by Consumers Price Index (CPI) is running at 5.4% as of February 2008. In fact, the true cost of inflation on everyday items such as petrol, pork, eggs, cooking oil etc. is substantially higher than the headline number of 5.4%

According to Lipper, right now, there are 97 Thai Baht money market or cash funds to choose from with a combined asset of Baht 2,632 mm. But unfortunately the average one-year investment return for the period ending February 2008 is only 3.3%, which is significantly below the rate of inflation. The latest industry trend seems to be Global money market funds in Australian, New Zealand dollars or even Irish pounds (Euro). Altogether, there are now 82 global money market funds with a combined asset of Baht 2,340 mm. to choose from but it's too early to tell whether the return is any better once everything is converted into Thai Baht. According to return numbers in Chart 2 below, the average return of Global cash funds is slightly below that of onshore funds.

Chart 2