I recently had the pleasure of meeting some new clients who provided me with the perfect example of why cash may be a ‘risky’ asset class. The couple in question had worked hard. They had diligently built up a significant sum to fund an exciting and fulfilling retirement and were about to embark on this journey.
Cash and cautious investors
My fascination came with their self-driven investment philosophy. We broached the usual discussion around risk when I first met them. They revealed that they had always been very cautious, focusing solely on a series of fixed term, cash deposits (or bonds, as they described them). When one matured, research was undertaken, and the proceeds rolled over into another new ‘bond’.
I was interested to know what had prompted them to contact us for advice at this stage. The answer was quite simple. Interest rates across Europe were turning negative and it was increasingly difficult to find new accounts that would maintain the purchasing power of their capital. There was also a ‘hassle factor’ involved. The ‘hassle’ being that over the years so many new accounts had been opened that these were now maturing with boring regularity. The responsibility of finding a new home for the cash, and the time taking to do so, wasn’t commensurate with enjoying a fulfilling retirement.
Times have changed
The reality of the situation is that times have changed. There is no easy way to get inflation-proofed returns on your hard earned savings without looking further afield than cash. It seems to me that there are many people who are still in denial about this.
The BBC published an article recently with the headline “National Savings and Investments (NS&I), which issues Premium Bonds, has slashed the interest rates it pays.” The cut is estimated to hit the savings of 25 million people. Their chances of winning any of the monthly prizes on offer have been cut from a one-in-24,500 chance, against one-in-34,500 now. It is also slashing the number of £100,000 prizes from seven to four and £50,000 prizes from 14 to nine. That’s a huge, overnight, reduction in the future level of expected returns. The full article can be read using the link below.
Alongside the issue of pitiful interest rates, there is also the risk of cash losing its purchasing power over time. People often think of cash as safe because its face value doesn’t fluctuate as it does with other investments. However, inflation is stealthy. Often we barely notice prices creeping up on everyday items because it usually happens quite slowly. The diagram below provides a perfect example.
Sticking with my client’s strategy to roll-over fixed term, cash deposits year after year would see the purchasing power of their hard-earned savings go into reverse. Combined with the ‘hassle’ factor noted above and surely you have a reason to explore the alternative options.
We would love to talk to you if you are in a similar position. Please pick up the phone or visit our website contact page here. We can help you feel comfortable with the fact that holding cash long term may actually be a ‘risky’ strategy and, with some sensible, financial education, suggest some alternatives that could be described as ‘safer’ options.