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Cash vs investing – what’s right for you?

With interest rates soaring and markets volatile, is holding cash the answer? We take a closer look.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Interest rates have soared over the last year and the Bank of England’s (BoE) recent hike of 0.75% to 3% is the biggest hike in 33 years. In December 2021, the base rate was just 0.1%.

We’ve also seen stock markets fall significantly. Bonds have also been hit particularly badly since this time last year, with UK government bonds down by 25% and UK corporate bonds by 21% (as of 08/11/2022).

Investors have had a tough time recently. And with interest rates on the rise, keeping your money in cash is looking more appealing.

However, while cash savings are important, it’s also worth thinking about things in real terms. And that means accounting for inflation.

Inflation is the change in prices for goods and services over time.

The annual rate for inflation (consumer prices index) rose from below 3.1% (September 2021) to 11.1% (October 2022) over the last year.

Although we’re now getting a much higher rate of interest on our cash deposits, the difference between interest and inflation is also greater. So, in real terms the value of our cash is in fact worth less than when interest rates were lower.

We’ve been used to interest rates being lower than inflation for some time now. In fact, we haven’t seen positive interest rates (when the interest rate you get on your cash savings is greater than inflation) since 2016.

The BoE’s long-term target for inflation is 2% and they will use the base rate as a tool to try and manage this. So, it’s possible the gap between inflation and interest could close. But it’s unlikely we’ll see positive interest rates in the near future. If the gap does close, all that will happen is our cash value won’t erode at such a fast pace.

This article is not personal advice. If you are unsure what’s right for your circumstances, ask for financial advice. Unlike cash, all investments and any income they produce can fall as well as rise in value, so you could get back less than you invest.

When is it sensible to hold cash?

Holding cash might not grow your money in real terms, but it’s still important as part of a diversified approach and can be particularly useful in a number of scenarios like:

  • An emergency cash buffer to cover unexpected outgoings like a new boiler, car maintenance or a drop in income. Typically, three to six months of essential spending is a good starting point for working people. If you’re retired, you’ll likely need more – one to three years’ worth is sensible.
  • Saving for short to medium-term goals like a deposit for a house, purchasing a car or a big holiday.

How to build your emergency cash buffer

What’s the alternative to holding cash?

Investing in real assets like property, shares and bonds gives you the opportunity to benefit from an increase in capital value and potentially receive an income from rent, dividends and interest payments.

Investing comes with more risk than cash though. House, share and bond prices can all fall. Rental income and dividends can reduce or cease, and interest payments on bonds can stop being paid. So, there’s a danger you could get back less than you invest.

The UK stock market has outperformed cash in 69% of two-year periods, but 91% of ten-year periods. A diversified investment strategy can help reduce risk and open up the opportunity for ‘real returns’ greater than cash over the long term (five years or more). Remember though, past performance isn’t a guide to the future.

When considering investing in the stock market, it’s sensible to take a long-term view. Markets have and always will peak and trough. But even when there’s a big trough, historically, the market has recovered. Of course, that doesn’t mean it will happen again.

How to build a portfolio

Time in the market not ‘timing the market’

Remaining invested over the long term means you’ll take advantage of the upward overall trendline of the stock market.

Trying to buy in and sell at the ‘right time’ is near impossible – even for the most experienced investors with world-class tech at their fingertips. It’s easy to damage your long-term goals and potentially your short-term financial resilience.

Waiting for the right time to invest?

Don’t forget about income from your investments

You could still receive an income even when the value of your investments fall. It can still be worth staying invested to maintain this income stream in tough times, but dividends might be lower as income is variable and not guaranteed.

This is especially important if you’re nearing retirement or are already retired. If this is the case, you should review your income and work out if you need a different balance of investments and cash. You could also consider other options, like annuities.

How will I know if I’ve got the right balance of cash and investments?

The right balance will depend on your personal circumstances, what you’re trying to achieve, and the level of risk you’re willing to accept and can afford to take.

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.

The importance of holding the right amount of cash

Financial advice from HL

Our advisers work with you to make sure your money has the best chance of doing what you need it to do. They’ll help you 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.

Find out more about investment advice

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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