Is cash still king?
Savers don’t need me to tell them that interest rates have remained stubbornly low for over 10-years. The Bank of England Base Rate fell to below 1% (to 0.5%) on 05 March 2009 and has remained below that level ever since, falling to a record low rate of just 0.1% on 19 March 2020 before returning to 0.5% on 03 February 2022.
The chart below tracks the changes in interest rates between May 2006 and May 2021 and helps by graphically illustrating the key point I want to make in this blog, which is that cash does not offer any long-term hedge against inflation in the current climate.
Apart from a brief period between January 2015 and May 2016, when Base Rate exceeded CPI, the opposite has applied since May 2008. The effect of this is that cash on deposit, even with interested added and accumulated, has lost its buying power.
What should I do?
Everyone should take a long look at their investment strategy and ask the question, “Am I making the most of the money I have?”. If you have an excessive cash reserve, the answer to this is likely to be in the negative.
Clearly, everyone should have a cash reserve – funds that they can call on at short notice – and there is no hard or fast rule to determine the level of that reserve. Someone of working age, for example, should consider by how much and for how long their income would fall if they were unable to work through illness, injury or redundancy, and build a reserve to cover essential expenditure for that period. Someone who is retired, with a guaranteed income sufficient to cover their basic expenditure, may need less of a reserve.
Should I invest my surplus cash?
In the medium to longer-term, the only way to have any real hope of beating inflation is to invest, with professional advice, of course. However, the statement, “The value of investments can fall as well as rise, so you may not get back the full amount invested”, isn’t quoted just because it is a regulatory requirement, it’s because it’s true. Consequently, before investing your surplus cash, in addition to the prudent reserve referred to above, you should also consider what you may need in, say, the next 3-years, and keep that in cash. All investment should be considered as being for the medium to longer-term, so 5-years+, but, through most investment cycles, a 3-year period is generally long enough for a well-managed strategy to have evened out the ups and downs to an overall positive outcome. However, this is not guaranteed.
If you think you have too much in cash and want to consider investing some, then ask me today or complete the form below and I’ll give you a link to our risk profiling tool to start the advice process.