When I am trying to save up for an investment the money usually builds up in the form of bank deposits and/or money market accounts. I am starting to question whether this is the optimal approach.
My most common savings goal is a deposit for a property purchase. This has been a recurring situation for several years now and I expect it to continue for at least a few more years. This means that I am constantly putting money aside into bank deposits and/or money market accounts.
Cash and bank deposits are lousy investments over the longer term. Given that I am almost constantly building up such investments (before drawing down to spend them) it means that I am averaging a level of cash/deposits which is sub-optimal in terms of portfolio management.
Instead of accumulating the deposit for the next property investment in the form of cash/deposits, I am considering putting the money directly into a low cost index fund. The logic is that the equity investment should, on average, show a significantly higher return than cash/deposits over the medium term. In fact the local Hang Seng Index tracker fund shows a yield which is very similar to large Hong Kong dollar deposits meaning the market only needs to move by more than the transaction costs to show a gain on this strategy.
Of course, there is no such thing as a free lunch. Investing in equities carries volatility risk. If the market moves against me, I will either have to delay the purchase or take the loss. Given that (i) I am in no hurry to acquire the additional properties and (ii) I am underweight equities anyway, this may be a risk that I am prepared to live with.
I would not follow this strategy with money that I could not afford to lose or if the money being set aside was needed for something I must spend it on within a short time period. But with investment properties for which there is no particular sensitivity on timing, it would appear to have potential.
Just a thought.