Cash is not king
Whilst most clients keep relatively modest sums of money in bank and Building Society accounts, I do regularly come across some clients who have disproportionately large amounts of money in cash or cash equivalent savings such as Premium Bonds.
Research shows that cash is one of the most poorly performing asset classes over the long term, by which I mean 10 years or more. The most consistently best performing asset class over the long term is shares.
We of course manage our clients’ money using a strategy of diversification. In other words we do not put all of our clients’ eggs in one basket. We recommend investment into the 4 main asset classes of cash, bonds, property and shares. Cash is limited to 2% purely to cover fees. Mostly the money is invested in shares. The higher the client’s attitude to investment risk the larger the proportion invested in shares and vice versa.
I regularly advise clients to reduce their cash balances and re-invest into our recommended Wealth Investment Strategy. Sometimes they do follow my advice but more often than not they decide to keep a large amount of their savings in cash. Why is this?
Well one of the reasons is that some people simply like the comfort of knowing they have a large cash balance. I can’t really argue with that. Others want instant access in case of a rainy day, but they do not realise that they can access their investments usually within approximately 3 weeks without penalty with us anyway. Some people think they win lots of prizes with Premium Bonds but the average person only earns about 1% a year or less in prizes. Other clients do not realise that they are actually losing money every year in real terms when you take into account inflation which is consistently higher than the best bank interest rates available. Many clients do not realise that Cash ISAs can be transferred into Stocks and Shares ISAs without any loss of tax benefits.
Research shows that over periods of at least 10 years, shares outperform cash over 90% of the time. Over longer time periods the likelihood of shares outperforming cash is nearer to 100%.
Even the dividends on shares are typically higher than bank interest. For example the dividend yield on the FTSE 100 Index is currently 4.3%! It is difficult to find a bank account paying interest of much more than 1-1.5% at the moment.
I met a long standing client and his wife recently. They have about £250K in investments with us and a similar sum in cash deposits. The husband would like to invest more money with us but his wife is more cautious so she is less keen. This is in spite of the fact that they are earning a maximum interest rate of 1.8% a year whereas their investments with us have risen in value by 10.85% over the last 12 months! What’s more, they do not need the cash!
It seems illogical doesn’t it? However, once I explained that Cash ISAs can be transferred into Stocks and Shares ISAs, his wife became more interested. It is now likely that they will transfer their Cash ISAs to Stocks and Shares ISAs once their current fixed rate Cash ISAs mature in September.
There is an old saying that cash is king but when it comes to investment cash is not king.
So if you have a large amount of money invested in cash or National Savings, why not re-invest it into shares instead? You know it makes sense.