Cash investing friend or foe?

With the cost of living increasing across the board globally, essentials like food, fuel and energy are experiencing some of the biggest increases, hurting the bottom line of many households.

As a result some investors are looking at a defensive cash investing position, but even though the nominal value of cash and investments will not go down if you hold cash, due to increases in the cost of living over the last ten years, inflation has eaten away at the purchasing power of cash over time. For that reason, and the low yields of cash assets, cash has steadily lost real value in terms of its purchasing power over the long-term.

Whereas it can be argued that the last decade has, for the most part, been unusual due to the ultra-low rates policy of central banks globally, it is also true that, until 2021, this was accompanied by a milder inflation environment, although not low enough to prevent negative real cash yields (after inflation).

If we look at the very long-term data series from the Office of National Statistics, using the Retail Price Index, and the historical base rates of the Bank of England, the average annual compounded inflation has been 4.2% since 1900, and 5.2% in the post-WWII period, to September 2022, which implies a significant dent to cash returns once inflation is taken into account.

Some investors use cash in a way that can detract from their ability to reach their long-term investment goals, either by holding onto it for too long, which can limit the potential return on their savings and investments, or by using it when the market feels risky, which can cause them to miss out on market-recovery opportunities and some of the best available returns.

Remember the old saying, ‘don’t put all your eggs in one basket’. Diversification can help investors manage and spread risk!

Diversification means making sure investors are not relying on one type of investment too heavily. This can help protect investments, reduce volatility, and lessen the impact of any one asset class performing badly, but won’t eradicate risk entirely.

Some common mistakes investors often inadvertently make are failing to set up a long-term plan, allowing emotion and fear to influence decisions, not diversifying their portfolio correctly to meet their risk appetite, and putting their money in multiple funds that hold basically the same asset.

One approach to consider could be using a risk profiled, globally diversified, multi-asset fund. Embark Investments multi-asset globally diversified approach seeks to take advantage of different market conditions through dynamic active management, aiming to deliver returns in line with the investors risk profile over the medium to long-term (5 or more years).