Sitting on cash has, historically, been a fairly safe bet. Cash savings are protected from the fluctuations seen in the stocks and shares market, while choosing to not invest means that more of your wealth is available for emergencies or big purchases.
So long as interest rates keep up with inflation, cash savings will hold their value over time. The problem comes when interest rates drop, as they did in the aftermath of the 2008 crash. Rates are still yet to rise significantly and them being lower than that of inflation means that, over time, the real value of cash is eroded.
A recent survey by Moneyfarm found that over a third of investors keep 40% or more of their savings in cash. We look at the reasons behind this, as well as examining the impacts of holding a large proportion of your wealth as cash over time.
When will interest rates go up?
Last year, in response to the impact of the spread of coronavirus, the Bank of England dropped interest rates twice in the space of a week to an unprecedented low of 0.1%.
As economies slip into what could be significant recessions, governments the world over have taken often unprecedented measures to mitigate the impact. Low interest rates are one of these measures and, depending on the duration of the economic problems, we may not see a rise for some time.
The need for decisive action by financial institutions is so great that debate around negative interest rates has lingered throughout the pandemic. It is worth noting that inflation has also dropped as a result of the crisis, but it still sits significantly higher than interest rates.
Depending on the severity and duration of the current economic uncertainty, we could be waiting some time before genuinely attractive interest rates are back on the table.
Growth can be found elsewhere
People naturally want their wealth to grow over time. Of those we surveyed, nearly two-thirds highlighted competitive interest rates as the most important aspect of a savings account.
If the growth of your savings is important to you, it is worth considering exactly what those savings are for in the short and medium term. If you are unlikely to need access to the money in the short or medium term, growth can be more effectively found in stocks and shares portfolios. Exposure to the fluctuations of the stock market can be unsettling when it comes to your savings but, over a long enough timescale, the difference in growth can be staggering.
To illustrate this point, we recently assessed the performance of some hypothetical investment portfolios over a 10-year period. For the purposes of the study, we compared the returns of a hypothetical cash ISA against different forms of stock and shares ISAs, with differing degrees of diversification and different areas of focus.
Of the four projected portfolios, the cash ISA was the only one to return negative growth, the extremely low volatility not protecting it against the inflation felt across the decade. Though the stocks and shares ISAs saw significantly higher levels of volatility, they achieved far more healthy growth across the period as a whole.
Cash is not a long term solution
So, while holding cash is useful and comforting during times of economic volatility, the long-term outlook for savings that are focused on liquidity is poor. If you don’t need the money to be readily accessible, investment in a stocks and shares portfolio is more likely to significantly grow your wealth over time.
Over half of the respondents to our survey cited ease – and conditions – of access as their top reason for holding cash. People want to know that, when they need their money, it’s available to them quickly and without complications. A savings account, then, is the most logical option.
This access is not exclusive to cash, though. Some investment accounts will allow for frictionless withdrawal as and when you need it.
With a Moneyfarm account, for example, you can action disinvestments at any time and have the money back in your account typically within 5 – 6 working days. So, unless you need your funds to be available at extremely short notice, it is worth considering the gains that could be made by investing in an easy access stocks and shares portfolio.
What investment account is right for you?
Deciding to invest stagnating cash is one thing, but choosing the investment product that fits best with your financial goals can be daunting. Below is a quick look at the most common investment accounts – Moneyfarm offers them all, with low-costs and active portfolio management.
ISA – For tax-efficient, easy access investing, look no further than an ISA. ISAs are designed to help everyone meet their financial goals – we just add a team of experienced investment managers, qualified investment advisers, low costs and strong performance into the mix.
General investment account – Filled your ISA allowance? Whatever your investment situation and personal financial goals, a general investment account will put you on the right path. Ours is low-cost, actively managed and gives you access to our highly qualified team of investment advisers.
Private pension – For anyone with a very long term horizon, a private pension can be an ideal way to grow your wealth steadily until your eventual retirement. A Moneyfarm SIPP is globally diversified, actively managed and free to access in retirement.
Not sure which one suits you best? Our investment advisory team is always on hand to discuss your financial situation and talk you through the investment process, so feel free to get in touch.