Is it madness to invest in cash? The simple answer is yes, but as with anything to do with investing, it is far more complex than that.
We are living in a world of low returns, less liquidity, tighter regulation, increased competition and globalisation. When you include the advances in technology, it is clear to see why there has been a reduction in the competitive advantage for many firms, resulting in lower returns for shareholders.
It is therefore understandable that investors worry and wonder about what to do. Some choose not to do anything and stay invested in cash. Unfortunately, it has been a difficult time for savers to enjoy any real returns on their savings. Those waiting for a better, more predictable future to begin investing again have seen the value of capital erode and have suffered significant opportunity costs.
The prospects for fixed income aren’t much better. In fact, the outlook does not look attractive over the medium to long-term.
At the other end of the scale, equity markets have boomed, reaching historic highs. This poses its own risk. How sustainable is this rally, and will it come to an end soon?
With the investment landscape full of potential pitfalls across all asset classes, it is essential to develop a strong framework to think rationally and independently. Here are four key considerations when thinking about where and how to invest:
Think about the risk of losing money first, rather than investment returns
Protecting capital is a key step to building wealth over time. To understand, control and mitigate the risk of losing capital, you should get to grips with the underlying characteristics of your investments and assess the quality of the assets in your portfolio.
Make sure that you get value for your money
Even professionals can find it hard to assess the value of an asset; it is the only tangible factor you can use to make sensible decisions. Understanding the value of an asset relative to its price is an insightful tool to manage your investment decisions independently of market uncertainties.
Whatever you do, don’t pay attention to market ‘noise’
Many investors are influenced by things they cannot control, or fully understand, such as the outcome of the next election, a possible increase in the bank rate, exchange rate forecasts or even the oil price. Listening to this ‘noise’ is disruptive and leads to making a simplistic and often wrong decision.
Investing is easier with a long-term view
The compounding of returns at a reasonable rate plays an important role in investment success as wealth creation accelerates over time. With a longer-term perspective, you also be under less pressure to worry about short-term volatility in share prices and you will pay less attention to market noise.
There is no getting away from it, cash can be part of an investment strategy and can be considered as part of a portfolio. But it is utter madness to have the majority of your wealth in cash. Over recent years it has failed to keep up with the cost of living and this completely contradicts most people’s investment philosophy.
Investing certainties are less obvious than they were, but there are plenty of opportunities. Whether you are a DIY investor or prefer to leave the investing to an investment manager, you should always apply a mind-set of discipline, cautiousness and patience, keeping the four considerations at the front of your mind.
Philippe Pollet is Executive Director at Signia Wealth