Why it pays to think Long-Term
- Chris Young
- May 21
- 5 min read
Interest rates have recently been at a 15-year high. That can make it tempting to move money out of investments and into interest-earning cash savings – such as deposit accounts and cash ISAs.
However, a "dash to cash" may not be the smartest move for your money. Long term, keeping money invested in stock market-based investments, could deliver stronger returns. Here are a number of reasons to consider:
Cash Can't Keep Pace with Inflation
Inflation has been a big worry for all of us in recent years. In late 2022, prices were rising at an annual rate of more than 11%, due to factors such as the Ukraine war and lingering disruption from the COVID-19 lockdown.
Inflation has fallen sharply since then. But inflation is almost always with us – and effectively means the £1 in our pocket is constantly losing value as demonstrated in the table below:
One of the few ways to combat this loss in ‘purchasing power’ is to hold investments that can potentially grow in value at a faster rate than inflation. Time and again, assets like equites have been shown to deliver above- inflation growth.
By contrast, interest-earning deposits tend to track below the rate of inflation. So, although savings deposits can deliver attractive rates in the short term, it’s essential to consider what your return will be, once inflation is taken into account.
Savings rates will fall at some point
Just as a crystal ball can’t tell us how different investments are likely to perform, no-one can predict exactly what will happen to the interest rates. Although you may be earning an attractive rate now, you need to consider what rates might be on offer when they come to an end.
Again, a properly diversified investment portfolio can help to provide a buffer against that (and, indeed, many investments such as company shares may perform more strongly as lower interest rates benefit their business).
Holding a range of Asset Classes can help Optimise and Smooth Returns
Another reason for looking beyond cash is that different asset classes tend to perform well at different times. As such, multi-asset investing can be an effective way to capture strong performance wherever it arises. As can be seen in the table below:
Cash has delivered the worst performance overall.
A diversified approach means that any losses in one asset class can potentially be offset by gains in another. This can help the overall performance of a portfolio, creating a smoother ride.
Cash for a rainy day
Holding all your spare money in cash may not be a sensible long- term move. But having some easily accessible cash to meet short-term needs is essential – especially for emergencies like house and car repairs or periods of unemployment.
Advisers often recommend having at least three months’ and ideally up to six months’ worth of living expenses as a rainy-day fund.
This can provide a reassuring safety cushion. It also makes it less likely that you will need to pull money out of other investments unexpectedly – for example, just when markets have seen a downturn and investment values have fallen.
Being Patient Can Reap Rewards
The ups and downs of the stock market can be a real concern – and a reason why holding cash can feel very reassuring.
Over the longer term this is not a recommended strategy for wealth creation. The table below show the return on £1000 invested in various asset classes from January 1926 – December 2023:
Past Performance should not be considered a reliable indicator of future performance
Timeframe is always critical when considering any investment choice. As are a client’s goals, their attitude to risk and capacity for loss.
Taking a ‘bucket’ approach to savings and investments can be prudent. Dividing money into short term (e.g., up to three years), medium term (e.g., 3-5 years) and long-term (e.g., 5-10 years+) tranches and investing each in appropriate assets. Money can be moved between buckets, depending on when you think it might be needed.
In this way, you can ensure you have an all-important rainy-day fund whilst still optimising your potential to beat inflation and capture investment returns over the longer term.
Being Out of the Market can mean Missing Out
You may be planning to keep most of your capital on deposit – then move back into investments as soon as interest rates start to fall. But trying to time a re-entry into investment markets can be costly.
Lots of analysis has shown that just by missing out on the 10 best individual days in markets, investors can lose most of their return. It can be smarter, then, to keep some capital continually invested to avoid missing out on periods of very strong performance.
The best days can often follow the worst:
Summary
Cash deposits certainly have a role to play in investment portfolios and financial planning generally. But there are plenty of risks to allocating too much capital to cash.
By having a well-balanced multi-asset approach – you could be well positioned to capture return potential wherever it arises.
Taking a long-term, diversified approach helps to smooth out market ups and downs too.
How can We Help?
Initially by listening to your goals and aspirations and how you picture the rest of your life.
Once we have gathered the required basic information from you, we will set to work;
Collating all the wider information, assessing the suitability and costs of any existing investments, and carrying out the required calculations in order to put together your bespoke plan to help you achieve your goals
Produce a detailed cash-flow model following an in-depth analysis of your income and expenses which will clearly visualise your financial journey towards your goals.
Implement the plan
Once in place, we will monitor your investments and ensure everything is operating in line with your goals and objectives
Our periodic reviews allow us to assess any changes to your circumstances or goals, as well as any market or legislative updates, and then to adjust the financial plan accordingly.
and critically, be flexible enough to respond to the changes and challenges that life throws our way
Take a closer look here.
Get in touch at info@xvwealth.co.uk
This is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Past performance is not a guide to what might happen in the future.
An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.
