cash out

cash out

March 19th, 2010

As the Isa season draws to a close, advisers will probably feel as if they have dodged a bullet. Fund flows have held up and the added allowance has encouraged people to save. Still, there was a depressing reflection on this year’s Isa season from financial technology group 1st-The Exchange, which found two-thirds of IFAs say less than a quarter of their clients have taken advantage of rising stockmarkets with the majority still invested in cash. At the same time, a report from found that the average interest rate paid on a savings account was 1.84% – over 1% behind inflation. Investors were only beating inflation if they were willing to tie up their money for longer with fixed rate bonds paying an average of 3.09%. The majority of people are commendably paying off debt and then trying to improve their financial position by saving. But this is counter-productive if they are then going to effectively lose money on their savings. Although cash intuitively feels safe, it is the worst place for anyone’s investments – indeed, huge initiatives have been devoted to ensuring it is the worst place for anyone’s investments because the last thing the Government wants is for people to hoard money. The real risk is that if people are not investing now, it stores up trouble for the future – they don’t invest until markets are near their peak, they lose confidence once they fall and they don’t invest again until they are high. It’s a familiar story, but it puts people’s long-term wealth in peril. Is there any way round this? Capital preservation is clearly still the most important thing for nervous investors. If clients cannot be persuaded to take real equity risk on the basis they are more than likely to make better returns over the longer term, where might it be possible to persuade them to invest? There are a couple of key areas that might appeal. Absolute return is the most obvious. Unlike some of their predecessors – funds of hedge funds, with-profits, split-caps and so on – absolute return funds, for the most part, have done what they were supposed to do. They have, at the very least, preserved capital in down markets with many delivering real, positive returns. One less obvious area worth considering is emerging market debt. The strength of emerging markets is relatively uncontroversial, but using debt instead of equity should help avoid ‘bubble’ issues while generating a good income. Failing that, corporate bonds may have enjoyed a strong run, but they still offer a better risk-return profile than cash. Ultimately, holding cash will make clients poor over the longer term and it is an adviser’s job to ensure that doesn’t happen. For investment advice please contact Mark or Clare at GMP Independent Financial Advisers LLP on 0207 288 6400

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