A financial adviser’s guide to common cash myths
Bradley Clark, Financial Adviser, dissects three of the most common cash myths he hears from clients and looks at how to make your money work harder.
As a financial adviser, one of the most common conversations I have is with clients who currently hold cash and want to make their money work harder for them.
For some, making the decision to invest is an easy one. But most of the clients I speak to, who are a bit more cautious and often hold their money in cash, find the decision more difficult.
Here are three of the most common cash myths I hear from clients and how to address them.
This isn’t personal advice, so if you’re not sure what to do, please ask for financial advice.
1. Cash is risk free
One of the myths I hear most is that cash is a risk-free asset. While cash won’t suddenly drop in value like a share can, cash shouldn’t be classed as risk free.
To explain why, it helps to firstly consider what ‘risk’ is.
In a financial sense, most people immediately associate risk with the value of money going down.
But we should be looking at it in a different way. Investing money is where you avoid spending it today in the hope that it’ll be worth more in the future. Risk is the possibility that this objective won’t be achieved.
Let’s use an example with £1,000. You can either spend this now or invest it in the hope that it’ll be able to buy you more in the future, let’s say 10 years’ time.
If you receive 1% interest on your cash while inflation is 2%, then in reality your money’s buying power is decreasing by 1% every year. After 10 years, your £1,000 would be worth £902.56 in today’s terms.
In other words, you would’ve been able to buy more with your money on day 1 than you could’ve done in year 10.
Over the long term, investing in a diversified portfolio gives your money the best chance of growing – helping you reach your future goals. But remember investing means your money can fall in value, perhaps even further than by inflation, so you can get back less than you invest.
2. The market’s at a high point, it’s better to wait until it drops again before investing
Here’s a statement I recently heard from a client: “The market’s at a high point – I will wait until it comes back down again before investing”.
On the face of it, this seems like a sensible statement. But there are two challenges to that statement.
The first is the market is at a high point compared to what? It may be high compared to say, a year ago but if you’re looking over the longer term, this may not be true. So if you think like that now, you may look back in 10 years time and realise that you’ve missed out on some growth. Remember past performance isn’t a guide to the future.
The fact is, we don’t know whether the market is currently at a high point because we can’t predict the future.
The second thing we need to challenge is, “I will wait until it comes back down again before investing”.
How do you know the market will come back down again? And how do you know it won’t firstly rise from this point before then coming back down again?
Again, no one knows what the stock market will do next, not even the experts. And every day you remain waiting in cash to try and time the market, your money could potentially be losing value.
Remember, investments fall as well as rise in value, so you could get back less than you invest.
3. It doesn’t matter if the fundamentals aren’t in place
Before you think about investing, make sure you have the fundamentals in place. There are a few things you can do to help you be in the best place possible.
If you answer yes to the following questions, you could be in a good place to begin your investing journey.
- Do you have at least a five-year time frame for investing, ideally longer?
- Will you have an emergency cash fund of at least three to six months’ worth of normal expenditure after you’ve invested, rising to one to three years during retirement?
- Will you be able to tolerate the ups and downs that come with investing in the stock market?
- If the value of this money drops, will your day-to-day standard of living be unaffected?
If the fundamentals are in place it’s more important to spend time in the market rather than trying to time the market. But if they’re not then you should consider holding off investing until you’re in a better place to start.
It can be difficult to know where to start when it comes to your investment journey. With so many different opinions and lots of industry jargon out there, you might feel more comfortable holding onto your cash rather than worrying about investing.
But that’s where financial advice can really help. If you feel like you’re ready to invest, and you’ve got the fundamentals in check, an extra hand could make all the difference.
Advice can give you confidence around making investment decisions. What’s more, you can be as involved as you like. Our advisers work with you to make sure your money has the best chance of doing what you need it to do. They will help you to become more confident about your finances, whether that’s to tweak your portfolio, or even a full review of your financial plans. Plus you’ll only ever pay for the advice you need.
You can get started with a free phone call with our advisory helpdesk. While they won’t give you financial advice, they’ll be able to help you decide whether advice could be right for you and provide more detail about the charges.