Should you keep savings in cash or invest?
Our Financial research partner, Square Mile have put together a very useful summary of the pros and cons of holding cash now that interest rates have risen so significantly.
Take a look at the full list below.
SK Paraplanner, Richard Simmonds, has written an article explaining a bit more about the situation which you can read here. But his advice is clear:
“For savers and investors alike, the fundamental principles still apply. Keep an emergency reserve of cash equal to six months regular expenditure. For short-term capital expenditure items up to about five years, hold cash with an appropriate level of access to capture the best rates you can. For longer-term, and that is five years plus, invest in assets which consistently provide a return that is higher than inflation. Cash is King in the short-term, but real assets such as equities and fixed income are better bets over the long term.”
Square Mile: Advantages of holding cash
- Cash is now offering 4% interest, which is an attractive return and will not lose value in nominal terms.
- Cash rates will (or last should) increase as interest rates rise, although this will likely not apply to fixed-term accounts.
- If inflation proves stubborn and interest rates need to move higher or stay high for a while, then cash rates should benefit from this.
- If inflation falls below cash rates, then investors will make gains in real terms.
- Cash can help shelter portfolios from short-term market volatility.
Square Mile: Disadvantages of holding cash
- Cash rates will decrease as interest rates fall, reducing returns; and providers will likely be very fast to cut rates on products as interest rates come down.
- Yields on bonds are always typically higher than those from cash. The UK 10-year government bond is currently yielding 4.5% and corporate bond markets (debt issued by companies rather than governments) even more than this; closer to 6% for the UK corporate bond market.
- Bond yields will likely fall as interest rates drop and this should increase bond prices therefore adding capital growth. For example, a 1% fall in yields should lead to a capital gain of c.10% for a 10-year bond.
- Cash must be held on account or invested in a money market fund for the whole year to capture the full rate.
- Investing in cash will reduce/remove the participation in any continued market recovery, in bonds or equities. These asset classes have proved to deliver returns ahead of cash rates over the long term.
- Being out of the market, both bonds and equities, on days when they move up very sharply dramatically reduces the long term returns for portfolios, i.e., consistently timing the market correctly is impossible. These days often happen when markets are volatile and performing at their worst.