Our thoughts

Cash Vs Investing

The Bank of England’s Base Rate is currently 5.25%; we’re hearing National Savings and Investments offering 6.2% interest rates on deposits, nearly 5% after tax; First Direct offering 7%; these aren’t levels we’ve heard or experienced since 2008!

My question to you is: are these interest rates attracting you away from investing?

Firstly, I think it is worth remembering that the general principles of the economy haven’t changed:

Governments have to pay higher returns than cash to borrow money.

Governments need to raise money through debt; if cash rates are 5%, Government Bonds have to offer more than that to make it attractive for people to buy them. If you can get a higher interest rate in a fixed rate account with your high street bank, why would you lock your money up for 5 or even 10 years in a Government Bond?

Companies have to pay more than Governments to borrow.

Similar to the above, companies must make it attractive for you to lend to them rather than the Government. For example, if cash is at 5% and Government Bonds are 6%, Corporate Debt (Corporate Bonds) must be higher, otherwise, why take the additional risk? This all comes back to risk vs reward and our own attitude to risk.

Equities have to offer the chance of more than, you guessed it, Corporate Bonds.

And again, just further down the chain, companies need to generate a return for their shareholders, as they are taking an increased risk compared to bondholders. Think about it, if shareholders achieve a better return with their money in the banks, soon there would be no shareholders.

What we’re trying to explain here is cash sets the bar, everything else just needs to jump over it.

Of course, it would be lovely to think that this time is different, and today’s investment circumstances are unique: Government debt levels have soared, political turmoil in Ukraine and the Middle East. Include the fast-developing technology of AI…

But is it really?

Between 1993-2007 interest rates averaged at 5.35%, Government debt had risen from 20% of GDP in the 90’s to over 50% in the 00’s, political issues in Middle East and Russia, and the internet was changing society as we knew it.

So, should we have just stayed in cash for all this time? No of course not!

Quilter Investing for the Long Term

If you’d have invested £10,000 in 1992 and invested as per the Bank of England base rate, at the end of 2022 you would have had £26,325.

Now, if you’d invested that in a multi-asset solution (Bonds and Equities) you would have averaged a return of £89,032.

Which would you rather?

Lucy

Lucy Gilbert – Pension, Investment, Equity Release and Mortgage Adviser at DBFS

Note: Slide included from our friends at Quilter (just for context), but we are fully independent and whole of market, and not promoting Quilter’s products or services.

Is it really time for cash?

Investment values have been flat for what feels like forever, and savings accounts are currently offering 5% (or even more). Should you cash in your investments and enjoy the guaranteed comfort blanket of interest on your cash?

Well, as always that depends, but probably not.

In previous articles I’ve written about how having an appropriate amount of cash is fundamental to having a balanced investment portfolio and not being over-exposed to investment and its associated volatility. An appropriate amount of cash is the foundation stone on which everything else is built.

Global investment markets have had a difficult and turbulent time over the last few years, in fact, the events that we’ve experienced, and the sequence of those events, have been truly remarkable; the phrase that I’ve heard more than any other from fund and portfolio managers has been “you couldn’t make it up”.

September last year was the icing on the cake. Due to government naivety the value of the pound crashed, along with the Bank of England Gilt markets. Bank of England Gilts have always underpinned any cautious or even remotely cautious investment; they are like the Super Tanker heading across the Atlantic, they don’t really deviate too much and are very predictable. Or were, until that moment last September. One of the many bizarre situations that we’ve experienced in the last few years, is that last September, the more cautiously you were invested, the more adversely you were affected. Bonkers.

Historically, investment markets have always recovered and have outperformed the returns available on cash. Investment markets also have the ability to turn and move very swiftly (even the humble FTSE 100). Of course, I’m not suggesting that will always continue; I can’t predict what will happen in one minute’s time, let alone one year’s time.

One of the mistakes private investors typically make is investing money when asset values are high and selling assets when their values are low. This is 180 degrees out from what a professional fund or portfolio manager tries to do; they buy low and sell high. So, selling well-managed assets that currently may be undervalued, to move that money to cash, is unlikely to be a good idea (as long as you were appropriately provisioned with cash in the first place).

Due to how swiftly investment markets and market sentiment can change, the timing of when to sell, and when to reinvest is incredibly difficult; even fund managers take a long-term strategic view, and there’s an often used saying when it comes to investment returns, “it’s time in the market, not market timing”.

Even missing just the first couple of days of being invested, when ‘the market turns’ can have a significant impact on the value of a portfolio. Statistics have shown that missing the best 10 days of market movement can have a 50% detrimental effect of the value of a portfolio after 15 years!

My suggestion is that if you already have an appropriate amount of cash and are appropriately invested, then leave that investment to do its job.

The nights are already drawing in… it’ll soon be Christmas!

David

David Hinch is the Managing Director of David Burnell Financial Services.

Is investment right for me?

With the distractions of the festive period behind us, thoughts often become focused on the year ahead and trying to make improvements to our hectic lives. In my previous two articles I discussed cash savings and how they should be used (if possible, in these increasingly expensive times) to form the foundation stone of our financial planning.

Let’s now imagine that we’re fortunate enough to have an appropriate level of cash savings and feel that we should be doing something else with the extra. Should we invest? Well, just as nearly all of my answers begin… it depends.

As soon as we want to do something with money, that involves trying to get a return that’s better than what is being offered by a Bank or Building Society (in interest), we generally need to make some sort of investment, and virtually all investment comes with an element of risk. Risk is one of those words that can mean something very different to each of us, and there’s also a large spread of different levels of risk. Risk can be something very minimal, that may see the value of our investment go up and down by very small amounts, or, at the other extreme, may see the value of our investment fall to zero (very extreme[!] and only appropriate for a tiny minority).

Because of the spread of different risk levels, and how each of us feel about investment risk, then working out what is appropriate for each of us is crucial. There is so much choice available when it comes to investment, that no one should ever feel uncomfortable with where they’ve invested their money. If they do, it’s almost certainly the wrong investment.

Working out what level of investment risk is appropriate, starts with completing an Attitude to Risk questionnaire. Attitude to Risk is not actually a term that I’m fond of, I much prefer ‘comfort with investment’. Anyway, once the questionnaire is complete (very straightforward, multi-choice and only takes a few minutes), then a conversation is required to explore the answers, to get a better understanding of how someone feels about investment.

One of the common misconceptions about investment and the appropriate level of risk, is concerned with the time available until the invested monies are required. Many times, I’ve sat with clients who are adamant that they are comfortable targeting significant returns (and quite high levels of risk), yet only have a few months before the invested monies are required. In most cases, the shorter the available timescale, then the lower the level of risk probably needs to be.

The reason why the risk level and timescale should usually be considered together, is because of what is known as investment volatility. This is the amount that the investment could go up and down in value; the higher the risk, the more that it could go up and down. If the timescale is relatively short, you usually wouldn’t want it going up and down in value by a large degree, or it could mean that when you come to take the money out, it might be worth significantly less than what you invested.

Anyway, that’s enough for now; my very best wishes for the new year.

David

David Hinch is the Managing Director of David Burnell Financial Services.

Is Cash King? Part 2

What a difference a year makes! If you read Part 1 of this piece (the last edition of City Life), I was writing about how inflation erodes the value (purchasing power) of cash; the article was typed in June of 2021, inflation was virtually non-existent, but expected to ease back up to 2% p.a. Now however, in this crazy world in which we live, we’re seeing short-term inflation soaring into double digits and can only dream of 2% p.a.

Do we expect the current situation to continue? All the experts say no. They claim that what we’re seeing is very much a combination of short-term circumstances that have come together to create ‘the perfect storm’; I don’t like this phrase, but in this situation, it seems entirely warranted.

Anyway, back to Part 2…

Imagine we are lucky enough to have some cash stashed away or can save on a regular basis (remember, the ridiculous cost rises that we’re currently seeing are supposed to be short-term!), how much should we aim to have in our bank, building society, or NS&I Premium Bond account?

As ever, with all my answers, it depends. Having the right amount of cash is a balance depending on your personal circumstances and spending needs. Everyone though, would benefit from having three separate ‘pots’ of cash; they certainly don’t need to big; they just need to be big enough. I’m going to refer to them as Current Account, Emergency Fund and Savings.

Current Account. Allowing a current account to become overdrawn can be an extremely expensive way of borrowing money. Some of the charges that banks and building societies make for an unauthorised overdraft can be eye watering. Therefore, if we can protect ourselves from those charges that can only be a good thing. Our aim with the current account is that after the last bill has been paid each month, there’s just enough left to cover the next bill (or two) that usually come out after our next monthly income has been received. Consider it a little safety net.

Emergency Fund. This is the bigger safety net. The idea behind this pot of money is that it sits there only in case of emergencies; there’s no plan to use it, imagine it has a piece of perspex over it that states “In case of emergency”. If you’re lucky enough to be able to have the ideal-sized Emergency Fund, it should be large enough to cover between four and six months’ worth of essential spending (essential bills and spending only, not ‘nice to have’).

Finally, the third pot: Savings. This is the money that we can use for all planned ‘big ticket’ spending over the next six to twelve months (holidays, home improvements, car, wedding, etc.). Things that can’t be paid for out of our normal monthly income.

If you’re fortunate enough to have these three separate pots of cash, then you’re well on your way to being in a really strong financial position and achieving a balanced approach to saving and investment.

Time to get a coffee!

David

David Hinch is the Managing Director of David Burnell Financial Services.

Is Cash King? Part 1

So, the day has finally arrived. Well, technically speaking, it arrived two days ago. I remember the discussion well, and I’m sure Nick Smith (City Life) said “Don’t worry, the deadline’s months away; you’ll think of something to write”. Oh dear.

Apparently, I agreed that I would write a series of articles to help City Life’s readers (hopefully that’s you), start thinking about investment planning and what it means. Blimey.

Okay, let’s dive in and start with a question I ask everyone who tells me they want to invest some money: “How much cash have you got?”

This isn’t some sneaky question to try and get them to invest all of their money, far from it. It’s to help make sure that they can afford to even consider investing money. It’s really important that before a single £ is invested, there’s enough cash in the bank or building society. So how much is enough?

Having an appropriate amount in cash is really important, but also a bit of a balancing act. Too little cash, then money that’s been invested may need to be withdrawn at a time when market conditions are less than ideal; too much, and you’re actually losing money. Losing money with cash? Surely, I’m talking rubbish? Sorry, I’m afraid it’s true.

Interest rates (the amount the bank or building society will pay you for having cash in your account) are really low; actually, they’re at an historic low. But at least they give you something, right? 0.1%? 0.2%? If you’re really lucky it might even be 0.5%. Great. Actually, that’s not great. Why? Because the rate of inflation (the actual cost of living) is higher than that.

As each year goes by, the cost of pretty much everything that we all buy, and pay for, goes up. Sometimes it goes up really quickly (ask a builder about the cost of cement at the moment), sometimes more slowly, but for planning purposes, we should think about the cost of living going up by 2% every year.

So, the general cost of ‘stuff’ goes up by 2% every year, and let’s consider a fixed amount of money, say £1,000 (to help keep the numbers easy, I’ll ignore the small amount of cash interest it may earn, and assume that the 2% price rise comes in one go, at the beginning of the year).

Imagine a cup of coffee costs £1 (I wish). In the first year you can buy 1000 full cups with your £1000; in the second year you can buy 980 full cups; in the third year you can buy 960; the fourth year it’s 941 and in the fifth year it’s 922. Only 922 cups in the fifth year, with the same £1000. Even for such a small inflation percentage, that’s a significant decrease in the purchasing power of your £1000. And yes, I know, even I probably wouldn’t drink that much coffee in a year.

Next time, I’ll explain how to work out what an appropriate amount of cash in the bank or building society might look like.

I think I need a coffee.

David

David Hinch is the Managing Director of David Burnell Financial Services.