There is nothing wrong with holding wealth in the form of cash on a short-term basis. For many people capital stability is important and access to ready cash is part of prudent financial planning. But when short-term holdings of cash turn into a long-term investment we should be seriously concerned.
Large holdings of cash are vulnerable to bouts of unexpected inflation, like the 1970s, or long periods with interest rates well below the rate of inflation – like today.
Since the financial crisis, cash has returned 1% or less a year, consistently below the prevailing level of inflation. We expect this situation to continue with the Brexit negotiations keeping UK interest rates low as the weak pound pushes inflation higher, eroding the real value of cash savings.
Many people still hold a significant part of their long-term wealth outside of their home and pension in cash. As a result, millions of people are seeing negative real returns on their long-term savings.
By contrast, money invested across a wide range of asset classes such as a multi-asset investment funds have beaten inflation and outperformed cash by a wide margin. No single asset class is likely to provide the combination of stability and return which most individuals would seek. But investments in a well-managed range of multi-asset funds can diversify risk whilst including exposure to higher returning assets.
Since the financial crash of 2008, such a strategy would have consistently outperformed cash in each and every year. The difference between the two approaches is the difference between turning £1000 from 10 years ago into less than £900 in today’s money with a Cash ISA investment against an estimated pot of over £1,500 on the same basis in multi-asset funds.
ISAs are increasingly being used as part of a long-term savings strategy alongside pensions, but holding cash is not a sensible option when interest rates are close to zero and inflation is on the rise. In the short run, cash is safe but in the long run it is risky.
As an independently owned IFA Company based in Manchester we would love to talk about how much cash you should hold back for a “rainy day” and how much could be considered for longer-term investment. Please contact your normal Cullen Wealth consultant or call 0161 975 6700.