One of the common statements we hear from our clients is that the cash they are holding in their bank or building society deposit accounts is not earning enough interest.
With interest rates at an historically low level this is not surprising really.
When they also take into consideration the fact that the rate of price inflation exceeds the rate of interest and that for many the interest itself is subject to income tax, all in all a bit of “perfect storm” as far as cash rewards are concerned.
However we would recommend that the advantages of holding cash are considered with as much weight as the disadvantages.
Cash is not subject to the volatility usually associated with other investment asset classes.
If I deposit £10,000 in a bank or building society cash account and I go back to it in a year’s time, I fully expect it to be valued at £10,000 plus whatever net of income tax interest has been accrued.
Yes, in real terms the value is less than £10,000 plus net interest, because of price inflation, but my nominal capital value has remained unchanged.
If on the other hand I invested my £10,000 in a basket of shares (equities) then in a years time I run the very real chance of seeing a value that is potentially much lower than £10,000.
There is a very good reason why the warning on equity investments, about their value potentially being much less in the future, is so prominent; it could in fact be true.
Of course the opposite is also true and the equity value might be significantly higher.
This leads me to a conclusion that is worth considering, “If you don’t need to take investment risk then don’t take it”
If you can achieve the Financial Planning goals and objectives that you have set yourself by keeping most of your money in cash then that would seem to be a sensible thing to do.
We also often hear “I have too much in cash”. Can that really be true?
Well in some cases yes it can, but other times perhaps the desire for greater returns than those available from a cash account is e wrong approach.
In my experience being too cautious is generally less risky than being too adventurous.
Cash can indeed be ‘king’.
Photo credit: Flickr/neilalderney123
