What a silly question to ask, but many people are thinking it more and more. I get asked the question about where to hold cash savings just about every week from my clients and the comments I get range from, “Martin, we’ve got to do better” to “I can remember when interest rates were 12%, how come we can’t get those rates anymore?”
Let’s face it, interest rates have now been on the floor for so long, decent interest rates in deposit savings are now a distant memory and there are people in their 20’s and 30’s who have never known an era of interest rate returns in double figures.
What is the problem if interest rates are low and inflation returns?
The idea of having too much cash is hardly likely to get much sympathy from most of the population, as unfortunately most people do not have enough savings. However, on the other side of the fence it’s quite often the case that those who do have a decent savings hold too much of it in cash.
And this has been put back on the agenda for investors with a warning that inflation could soon reach 4%.
Needless to say, if that does happen it’s not good news for your money.
If inflation rises only a few percentage points and the best savings accounts pay 1%, the real value of money is going to start to fall noticeably. In the short-term we can live with this, but if inflation remains an ongoing problem, we have a problem – in simple terms the erosion of the purchasing power, stops cash being the safe asset we like to think of it is. Yes, ‘cash is king’ but only up to a point.
The problem with eroding cash values is that it is an ‘invisible threat’. We just don’t see it happening and often it is only over the longer term that we see the effect. If you can remember when a pint of beer cost less than a £1, you will know what I mean.
So what should you do with spare cash?
History is no indication of what the future will hold and the value of any investment can go down as well as up. But, let’s for a moment look back into the history books. If you had invested £100 in the UK stock market in 1945 it would have been worth £179,695 by 2015 with dividends reinvested, compared to £6,261 if saved in cash, according to the Barclays Equity Gilt study. There is of course no certainty that this will be repeated.
What should you regard as spare cash?
Firstly, you need money for emergencies and this varies for all of us. At the very least, holding 3 months expenditure is regarded as wise and for some it may even be up to 12 months expenditure. Prudent financial planning suggests that you need available cash to replace the boiler, change the washing machine or pay for the unexpected work on your car. Rainy day money if you like. So this money needs to be accessible and safe from any fall.
Invest the rest, but beware of market volatility
In the short term, markets can be volatile and the last thing many investors want to see is the value of their investments to fall, so the amount of risk an investor can afford to take and are prepared to take are really important. There is a perception that as soon as money is moved out of cash and into an investment, the money is immediately exposed to high risk. Not so.
Stepping into the investment world can be daunting, however there is a whole spectrum of risk open to investors from cautiously invested portfolio’s to the plain and simple ultra aggressive portfolios. Put simply, there are plenty of options which a good financial adviser will be able to help you with.
In the most severe cases, mental disorders occur.
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The difficulty investor’s face is weighing up the opportunity cost of keeping that cash in a deposit account, when it could possibly be out there working more effectively by being invested. In the short term cash is very clearly a much safer option than investing, so when making the decision to investment some money, your time scale is very important. Investments need time to work well for you as short term market movements could affect the value. To be a successful investor a time horizon of a minimum of 5 years would be sensible and even longer is going to give you an even better chance of making good returns over and above cash on deposit.
If you think you are holding too much cash on deposit, maybe now is the time to consider investing some of the money as a hedge against inflation. Contact us today, if you would like to talk about investing.
It is advisable to take advice from a professional financial adviser when making major financial decisions.
Contact Martin Dodd on 01902 742221 or email him at [email protected] if you would like talk about money issues.
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The contents of this article should not be regarded as specific advice. No responsibility can be accepted by Martin Dodd or Midlands Investment Agency Ltd., for any loss that may occur by a person acting or refraining from acting on the basis of this article.
