Staying in a growth fund versus switching to cash

There was a great article from the Weekend Australian Financial Review (September 18-19, 2010) called "Staying in a growth fund versus switching to cash" that I wanted to share with you.

The diagram and summary of the article are as follows:

A retiree commenced an account based pension in 1984.

The asset allocation of the pension account was a growth fund with 50% Australian shares, 15% international shares, 10% property, 20% fixed interest and 5% cash.

The retiree was drawing the minimum pension.

Between February 1984 and the next 3 years, share markets roared ahead.

However, in October 1987 a crash took place and share markets fell sharply.

3 years after the 1987 crach, the retiree became increasingly nervous about the share market and if a switch to cash was the better option.

Looking at the diagram, the grey line shows what would have happened if the retiree stayed in the growth fund and the red line shows what would have happened if the retiree switched to cash.

The diagram shows the results in today's dollars after taking into account inflation based on an investment of $100,000.

As the diagram shows, the retiree would have been better off staying in a growth fund versus switching to cash. If a different starting and ending date were chosen, the results can vary to such a degree that switching to cash may have been better.

My thoughts. It's extremely difficult to time market rises and falls. So I believe the best solution is to choose an asset allocation that allows you to sleep comfortably at night and that you can maintain for the required minimum time frame (7 years for a growth fund). And forget about timing the market.

Important Information

The above information provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The above information doesn’t take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser.