The cash trap: Why doing nothing with your money can cost you

The cash trap: Why doing nothing with your money can cost you
Key takeaways

Despite seemingly high interest rates, inflation means the ‘real’ return on cash is still very low


Looking at the decade ahead, we expect non-cash assets (investments) to offer better returns 


Cash may be comfortable, but too much comfort could prevent you building your wealth to its potential over the long term

There was a time when saving cash meant parking it in the bank and sitting back to enjoy a decent return. Not so much nowadays.

Despite high interest rates on savings accounts, the ‘real’ return on cash has actually been negative for most of the past four years. 

Figure 1. Inflation, Bank of England base rate, real return on cash

Source: CPIH inflation data from ONS, Bank of England base rate from BOE. ‘Real return’ subtracts nominal cash rate from inflation rate. Jan 2020 to Jan 2024. 

Real return is exactly what it suggests: what you really get once inflation is taken into account. And with inflation running at 3.8%1, if you have your cash in the average easy access savings account earning 2%2, you’re actually losing money in real terms.

Holding cash may feel like playing it safe – but recently it has meant playing a protracted losing game.

But there’s good news, too. With the new tax year upon us, this is an ideal opportunity to review your goals and refresh your gameplan for the rest of 2024. 

Three reasons to consider diversifying your savings strategy

1.     Multi-asset can help you strike a balance between risk and return

Holding cash will always have some appeal. It’s a fundamentally very low risk approach and unlikely to cause much anxiety – even if inflation is slowly eroding its value.

If you’re holding a lot of cash, you’re probably conscious of risk. Step forward, multi-asset funds.

These funds spread your eggs across different baskets, mixing assets such as stocks and bonds, occasionally with others like real estate and commodities. Unlike holding only cash, this approach gives you exposure to various sources of potential returns.

Stocks, for example, may prove resilient during inflationary periods. Companies making essential goods have the potential to do well because people will always need them. If you know the sector jargon, think ‘consumer staples’ and ‘energy’.

On the flip side, when money becomes tighter, people often reduce spending on nice-to-haves (‘consumer discretionary’), and tech stocks usually fall too.

Commodity prices tend to increase with inflation, so having some exposure could provide a buffer against the loss of purchasing power. These prices can be quite volatile, but in a multi-asset fund they might have some diversification benefits.

Meanwhile, bonds have something for everyone, from low-risk government bonds to their riskier high-yield or emerging-market counterparts. Bonds are the unsung heroes of steady returns, and they play a central role in many wealth-building strategies. That said, their prices can fluctuate a lot when interest rate regimes change, as we saw when interest rates were rising recently and bond funds performed very poorly.

Remember: it’s not always about having the ONE investment that outperforms in a given period or market environment.

A well-diversified portfolio typically has a mix of assets that perform differently as the investing environment changes. 

Figure 2. The best and worst performers have changed each year since 2005
The best and worst performers have changed each year since 2005

Past performance is not a guide to future returns. Source: Bloomberg, as at 31 December 2023. Total returns in GBP. Indices used: MSCI USA (US Equity), MSCI UK (UK Equity), MSCI ACWI, MSCI Europe ex UK (European Equity), MSCI Japan (Japan Equity), MSCI Emerging Markets (EM Equity), Bloomberg Global Treasury Total Return (Global Treasury), Bloomberg Global Aggregate Credit Total Return (IG Credit), Bloomberg Global High Yield Total Return (HY Credit), Bloomberg EM USD Aggregate Total Return (EM Credit), S&P Global REIT (S&P REITs), HFRX Global Hedge Fund (Hedge Funds), Bloomberg Commodity (Commodities). 

2.     Stay invested for the long term is usually better than trying to time the market

As an individual investor, you’re not beholden to quarterly or annual targets. So why not play the long game?

Market ups and downs increase the temptation to try and time your investments perfectly – but looking back through time, staying invested for the long term has generally yielded better outcomes for individual investors.

Sure, you can try to sell at the top. But when do you buy back in? What do you do if markets rise beyond where you sold? It can be very tricky to navigate. While you’re waiting for the ideal moment, a rally (increase in stock prices) can pass you by completely.

Here’s a stat: if you invested in global equities, missing out on the 10 best days in the last 20 years would have cut your returns by 50%. Now, it’s extremely hard to predict those days – some would say impossible. But it’s much easier to miss them if you’re chopping and changing all the time, trying to second guess the wisdom of the market.

If you’re going to invest, then adopting a long-term mindset, and turning time into your best friend, could help you achieve your financial goals.

Figure 3. Missing the best 10 days since 1999 cuts returns in half
Missing the best 10 days since 1999 cuts returns in half

Past performance is not a guide to future returns. Source: Bloomberg, as at 31 December 2023. Total returns in GBP.

3.     If it’s all too much – you can outsource the management

Navigating your finances can be difficult, at times overwhelming. A DIY approach is right for some, while a ‘DIFM’ (do it for me) approach is undeniably right for others.

Choosing an actively managed fund means outsourcing some of the decisions and administration to people who analyse market trends and risks every day.

Keeping all your eggs in the cash basket means relying on your instincts, which may or may not be the best strategy. Plenty of psychological biases stop us from behaving in a theoretically optimal or even rational way with our money.

A rising tide lifts all boats, but what happens when the tide goes out? Having someone else at the helm could be very valuable.

A professional fund manager's strategic control might give you the peace of mind needed to consider taking more risk to potentially earn a better return on your money. While there are no guarantees in investing, it could be worth thinking about.

A multi-asset fund typically prioritises risk management, and they have the potential to provide more opportunities to unlock growth and secure your finances for the future.

When every pound counts, it’s worth finding ways to make your money do more. Shouldn’t your money be working as hard as you do?

To secure your financial future, embrace discomfort

When you’re investing for the long term, the name of the game is real return. Why? Because that’s what reflects the true growth of your wealth after adjusting for the effects of inflation.

Sticking with safe but fairly low real return options can provide some relief from sleepless nights. But it might not be setting up your portfolio to provide you with financial security.

One option you can consider is diversifying with bonds and multi-asset funds.

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