It's a very rewarding time to have cash in the bank because of the high interest rates that people are getting. But, I'm going to talk about why investors should put some of that money to work into ASX shares.
Both 2023 and 2022 have seen periods of significant market decline. These periods seem like the best time to invest because that's when the prices are the lowest. It does take bravery and positivity to invest in a bear market, but that's when it makes the most sense to me to put money to work.
Don't worry, I'm sure there will be some more volatility in the future to take advantage of.
But, what I want to say today is that I'd start investing cash soon.
Next interest rate move will be a cut?
Interest rates have had to rise to tackle the high rates of inflation. The rate of inflation in both the US and Australia is starting to come down and that may mean we're seeing the highest central bank rate right now.
The next move by central banks now looks like it's going to be a cut. I'm not saying it's going to happen in February, and the first US cut could happen before the first Australian cut. But, I do think it's more likely that central bank interest rates will be 1% lower than 1% higher in two years from now.
With that in mind, cash could start earning a bit less and asset prices could get a bit of a boost. That could mean good news for high-quality bonds and share prices of high-quality ASX shares.
I certainly don't think central bank interest rates are going back to 1% or even 2%. I believe interest rates will be 3% (or more) for a very long time unless there's a (danger of a) major recession.
Where to invest in ASX shares
I'm not saying someone with $100,000 (or $1 million) should go and invest everything tomorrow. But, a regular investment strategy to deploy a good chunk of the money over the next few months could be effective.
Plenty of ASX shares are still a lot lower than their COVID-19 or pre-COVID highs like Wesfarmers Ltd (ASX: WES), APA Group (ASX: APA), Macquarie Group Ltd (ASX: MQG), Coles Group Ltd (ASX: COL), Xero Limited (ASX: XRO) and Sonic Healthcare Ltd (ASX: SHL).
Investors can also choose exchange-traded funds (ETFs) to get broad exposure to different countries or markets such as Vanguard MSCI Index International Shares ETF (ASX: VGS), Betashares Global Quality Leaders ETF (ASX: QLTY) or Betashares Global Cybersecurity ETF (ASX: HACK).
Over the long term, I think good businesses are going to deliver better returns than what cash is capable of. Cash is safer in the shorter term, though it can't protect against inflation very well.
ASX share returns can come from a combination of capital growth and dividends. Reinvesting dividends into more ASX shares can supercharge the power of compounding. I'd suggest keeping some cash on hand, for things like an emergency fund and having a bit of dry powder to invest in any opportunities that arise.
