Monday, March 19, 2007

Where to park short term savings?

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.


Raphael said...

It's a pity mortgage offset accounts are not common in HK. They're an excellent way to earn 5% (or 7.25% in Australia) tax free and risk free, with complete liquidity.

traineeinvestor said...


I agree that it would be good if they were available (and competitively priced) in Hong Kong. The combination of risk free return and liquidity is hard to beat. Of course, while there would be some tax advantage, given the low rates of tax in HK that feature would be less of an issue.