Are your investments relying too much on cash?
At the start of the COVID-19 pandemic, many people were understandably concerned about the falling equity markets and moved their savings into cash. The perception is that cash is ‘safe’, but financial advisers are now warning of the significant damage that could be done to long-term financial plans if too much is kept in cash for too long.
The need to save for the future has never been more apparent. However, the questions on many people’s lips are:
- How do I go about planning for the future in these turbulent markets?
- How can I keep my money safe without losing out on growth?
- Should I keep it in cash or should I invest?
Because everyone’s circumstances and needs are unique, only a wealth manager can answer accurately what is best for you. But here are the thoughts of our experts, to help make things seem less of a headache and give you a clearer idea of where to turn.
Is now the right time to invest?
Before March 2020, equity markets were at historic highs. It was throughout March and April that markets fell sharply, prompting many to move their investments into cash.
For many of those who have moved back into equities, it’s proved the right decision for them, as markets have steadily recovered, although they remain volatile. However, many people are still understandably unsure whether now is the right time to move their savings out of cash.
How safe is my cash?
Many people view cash as a safe investment because they’re not exposing their money to any direct stock-market risk. However, tying up too much of your savings in cash doesn’t mean you are risk free.
Low interest rates: Interest rates are at historically low levels. For example in Singapore the average Bank deposit account pays just 0.408% in interest.* This is not good news for savers. That’s because the interest is unlikely to grow their money enough to help them achieve their financial goals.
Then there’s the effect of inflation.
Inflation erosion: Whilst inflation is at such a low level, you may think to yourself why should this matter? When it comes to your longer-term investment plans, typically 5-10 years, you should consider how much the price of goods has risen over the last five years. If the cost of goods has risen, for example 1%-3% a year, and the interest rates continue to be low, it becomes clear how the purchasing power of cash savings may actually fall over time.
What are savers looking to do with their cash?
If you’re sitting on too much cash, either in your bank account or your investment portfolio, you could be missing out by not being fully invested in the stock markets. However, trying to time the market in this way has its risks.
Should you time the market?
Following the dramatic falls experienced by stock markets in March 2020, Share prices have recovered globally by more than 10%, and even higher in some cases.
Therefore, those who waited for the 10% market recovery before reinvesting would have stood to miss out on over £2,000 on a £10,000 portfolio invested five years ago. If they had waited for markets to return to pre-crisis levels, then their returns would have been more than halved with a difference of £5,333 in investment growth, compared to being fully invested.
Next steps
Cash is no longer the safe haven people once considered it to be, for long term investment. While it’s important as part of your financial plans, having too much could mean your money isn’t working as hard as it could be, meaning that you may not realise your financial goals.
Everyone should have a cash buffer in case of emergencies, but its important to get the right balance between your short- and long-term plans.
This is where professional advice becomes invaluable.
*https://eservices.mas.gov.sg/Statistics/msb/InterestRatesOfBanksAndFinanceCompanies.aspx
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