Robin Hall, managing director of Newport-based financial planners Kymin, says money saved during recent months as a result of the pandemic restrictions should not rest idle but instead could best be put to work…
One paradox of the corona virus pandemic is that even as businesses have shut down and jobs have disappeared some British households have been saving more money than they usually do due to lower spending.
But the choice between holding large amounts of cash long term in a savings account versus investing could have a big impact on your future wealth.
Prior to the Covid-19 outbreak data highlighted the fact that a considerable number of people already had substantial amounts of money in cash including those with £250,000 or more in investible assets.
The research reveals that 18 per cent of those with £250,000 or more in investible assets have 40-60 per cent of these assets in cash or at least £100,000. This group have benefited from the lockdown as 35.5 per cent say they have more money to invest than usual.
During periods of Stock Market volatility, the like of which we have seen over the past year, it is totally understandable that cash feels safe and can be looked upon as a security blanket of sorts. But in the long term it can be more harm than good to your financial well being.
By leaving large amounts of money sitting in cash you could be missing out on substantial returns over the long run. The rates of return on cash accounts are extremely low and have plummeted further since the Covid-19 outbreak with the average currently below the rate of inflation.
Research also reveals that this group is also aware of the opportunities with 42 per cent the largest of any wealth group thinking that there are good opportunities for the current market. Indeed 29 per cent would like to move their cash to investment but do not know what to do and 37 per cent plan to be more active with the investment t overall.
Every investor needs a cash buffer in case of emergencies but too much cash can negatively impact on returns. A good rule of thumb is to save six months of your salary in cash and then invest in a spread of different assets that can deliver a long-term return for your specific goals.
It is important to do this in the most tax efficient way by making sure you fully utilise your allowances including the Individual Savings Account (ISA) allowance and the pension allowance.
You might choose to invest because you are looking to achieve potentially higher returns on your money than you might get from holding cash and are comfortable with the idea of setting your money aside for the long term, at least five years or more.
Whether you are concerned that you will lose your money or just don’t know where to begin investing, it’s common for some people to hold large cash balances in deposit accounts especially in times of market uncertainty. But historically cash has not been a good store of value for individuals due to the corrosive nature of inflation eating into the purchasing power over time.
This is particularly acute in the current environment where deposit rates on cash are low and, in the event, inflation starts to accelerate. If you have excess cash balances, you should consider how to protect and grow your capital to meet your specific needs.
Investing does of course carry its own risks, but a well-structured and well diversified portfolio tailored to an individual’s requirements and managed sensibly ought to protect capital from inflation and the decline in purchasing power over time. Diversifying your investment portfolio is one of the best ways to reduce risk and this promote growth.
Kymin is a sponsor of the South Wales Argus Business Awards.