I know. This is an investment column, and I am poised to advocate for that inferior cousin, cash. So, first up, the facts.
Investing, over the long term, typically delivers you much better returns than cash. Superior annual returns, the power of compounding, and – if you’re clever and don’t put all your eggs in one basket – diversified sources of income and growth. Lovely.
Drip feed that money into the market over time and you benefit from pound cost averaging, buying units or shares whether they’re cheap when the market falls or expensive when the market is up, smoothed along the way. Invest through direct debit (sometimes called regular savings) with HL, and you’ll be trading admin free, dealing fee free and without the paralysis of trying to overcome greed or fear during market volatility. Even lovelier.
This article isn’t personal advice. Remember, investments rise and fall in value, so you could get back less than you invest. Tax rules can change and any benefits depend on individual circumstances. You can normally access money in a pension from age 55 (rising to 57 in 2028). If you’re not sure if an investment’s right for you, ask for financial advice.
But sometimes, cash is useful
Times like now, when the end of the tax year is approaching, and the stock market is challenging. Because even though we know we should not leave making the most of our tax allowances until they’re almost gone, many of us do. And making an investment decision under pressure is hard.
So, enter cash stage right. You can park your cash in a Stocks and Shares ISA or your Self-Invested Personal Pension (SIPP) now, to make sure you take maximum advantage of the 2025/26 tax year’s allowances, buying you time to make an investment decision later.
This kind of cash allocation is a tactical position however and should only be for the short-term. History shows that even if you invested just before some of the worst market selloffs in history, over time investors not only made back their losses but went on to positive performance. “Time in the market, not timing the market” is an adage for a reason. But of course, past performance is not a guide to future returns.
Cash can also be useful if you’re approaching a financial goal – be it a house move, holiday or retirement – and need to de-risk your portfolio and add valuation certainty. Lower risk investments such as cash or money market funds, and high-quality government bonds including gilts, blended with equities, helps dampen volatility and preserve capital.
Don’t forget about emergency savings
And then there’s the rainy-day fund. The money you need to hold just in case – the first step and foundation to your financial resilience. Cash is king here, you’re not worried about this money growing. You just want it there when you need it.
The amount you should hold in cash will vary depending on your circumstances. In general, we believe you should hold around three to six months’ worth of your essential spending as cash to cover emergencies. This helps insulate you against income shocks such as unemployment or reduced earnings, and expenditure shocks such as repairs to a car or household appliances.
This increases to a minimum of one years’ worth of essential spending if you’ve finished work and are retired, to reflect your loss of earning potential and the potential for fluctuating income from drawdown.
What shouldn’t you use cash for?
What cash is not, is a safe haven to run to when markets are bumpy. Volatility is alarming – and often the causes of it more so, particularly when it’s linked to geopolitical uncertainty. Selling out of investments now only crystallises losses. Stay the course, think long term and if you’re parking cash this tax year end – don’t stay there long.
