For well over a decade, we’ve experienced incredibly low rates of interest. But savers are now receiving much higher rates of interest, at a time when stock markets are (atleast at time of writing) going sideways at best. You could be forgiven for thinking that you’d be better off cashing in your investments and putting the money into, for instance, a one-year fixed rate bond paying 4.9% or so.
Compare this to an investment portfolio with 60% global stock market and the rest in defensive assets and, over a one, three or even five-year period, cash deposits may well return more than the investments.
We’ve included a chart showing the returns of an investment portfolio versus cash, and inflation, over the last 20 years. This herefore covers a period of higher and lower interest rates, and the results are startling. I know where I would have wanted my money to have been!
The issue is that investment markets move in surges both upwards and downwards and, in order to receive the long term returns that stock markets offer, you need to be in your seat and invested when those surges occur. Unfortunately, nobody rings a bell in advance so that you can quickly switch your money out of cash deposits. In the long run, we expect investments to achieve a higher than inflation return, and, in the long run, cash deposits are overwhelmingly likely to lag inflation.
There’s definitely a place for cash deposits and it’s important to obtain the best possible rates for your cash contingency fund. There might also be a portion of your capital that you don’t need for a year or two that could be allocated to a one or two-year fixed rate bond.
We work with our clients to establish the cost of their desired lifestyle and when the money is needed. We can then allocate the right amounts to cash and to investments.
It’s then a case of sticking to the strategy. Simple but not easy. We can help you.