Cash has traditionally been viewed as a risk-free asset class where investors can park their money and, unlike stock market based investments, know that the capital value of the deposit will not fall. However, we believe that the view cash is risk free is something of a misconception. Whether or not an investment suffers a loss from one year to the next is not the only measure of risk, there are other equally important factors to consider.
Inflation
The debate over inflation continues, indeed only today The Policy Exchange has warned that inflation could rise to 10% by 2012. The effect of inflation on your savings can be devastating if the interest you earn is less than the rate of inflation. And currently for most people it is: Inflation as measured by the Consumer Price Index is 3.1% and the majority of savings accounts and even cash ISAs are paying less than 1%. The end result is your savings will be able to buy you less in the future than they can now, meaning holding too much in cash in this climate could impact your purchasing power in the future.
Opportunity Costs – Shortfall in returns
While cash does remain low risk when compared to shares or even corporate bonds, the costs of staying in a low risk - low return investment could result in shortfalls in your end returns and mean you fail to achieve your long term investment goals. Whilst we certainly advocate holding some cash and other liquid assets within a portfolio, if you have a relatively long time horizon for investing, it is vital that you complement this cash with other more riskier assets to ensure you do not fall short of your long term goals.
The Solution
We believe it is important to constantly review your long-term investment strategy and decide if the current asset allocation of your portfolio is designed to meet your objectives and will achieve your long term goals. We have now entered the ‘Age of Austerity’ and selecting the right mix of investments will help you prepare best for the future.
How Bestinvest can help
Please call one of our Professional Advisers on 020 7189 9999 to discuss your personal requirements in more detail. Once we can understand your objectives, we can help you decide on the most suitable way of building your portfolio. The most important element of portfolio construction in our opinion is the split between different types of investments. We can advise you on an optimal combination of shares, fixed interest, commercial property, commodities, hedge funds and cash to achieve your long term goals.