How to keep cash-tempted clients invested

Traditionally, the saying “cash is king” has held true as a wise financial mantra, implying that having liquid cash at hand provides a sense of security and flexibility. However, the financial landscape in the UK has evolved significantly in recent years.

Last year saw equities and fixed interest decline simultaneously and, with interest rates on the rise, many investors have been reconsidering the role cash can play within their portfolios.

How should advisers approach this conversation with clients?

The Bank of England base rate is currently at 5.25%, with analysts tipping a potential increase to 5.75% by the end of 2023.

If clients were to shop around for the best rates, they could obtain up to 4.9% variable interest on an easy access account. Given the rate of return is lower than current inflation levels, this means the value of their cash is being eroded – and that’s before you consider taxation.

For some clients, a guaranteed return of 4% might seem positive, when the returns of the markets are unknown and variable

When deterring clients from moving to cash, be sure to explain its historical role, as well as providing real world analogies to inspire confidence in remaining in their investments.

Traditionally, cash has been seen to act as an emergency fund first and foremost. With historical returns bordering 0.5%, it has been left out of asset allocation conversations for some time.

For clients in decumulation stages, a slight favouritism to cash could provide clarity and reassurance for short term income needs, but it is important to note the investment journey is a long one and asset classes don’t always perform to our expectations.

For many clients, the thought of switching to cash is often driven by emotion. For some, a guaranteed return of 4% might seem positive, when the returns of the markets are unknown and variable.

If you suddenly slam on the brakes every time you encounter a bump or turn, you’re stalling your journey

Following market downturns in 2022, which saw even the most cautious investor’s portfolio fall in value, clients find comfort in certainty.

Here are some questions you might hear from clients and real-world examples of how I’ve answered them.

Question 1: The markets seem so volatile right now. Shouldn’t I just move everything to cash to avoid losses?

“Market volatility is a natural part of investing and it’s understandable this can be unsettling. However, the decision to move all your investments to cash should be carefully considered.

“Imagine driving through a series of winding roads. The road may have some bumps, twists and turns, but if you keep your eyes on the destination and navigate skilfully, you’ll reach your goal. If you suddenly slam on the brakes and park your car at the side of the road every time you encounter a bump or turn, you’re stalling your journey.

“Similarly, moving all your investments to cash in response to market bumps can stall your progress toward your financial goals, as you may miss out on vital market recoveries.

An overly conservative approach can lead to missed opportunities for growth

“Rather than seeking to avoid volatility entirely, a more effective approach is to diversify your investments. Think of it as having different types of vehicles in your financial fleet – some for smoother roads and others for rougher terrain.

“By diversifying across different asset classes, you create a well-rounded portfolio that can withstand market turbulence. This strategy could help cushion the impact of market swings.”

Question 2: I’m nearing retirement. Shouldn’t I move everything to cash to ensure I don’t lose my savings right before I need them?

“Approaching retirement is a significant milestone, and preserving your hard-earned savings is undoubtedly a priority. However, moving entirely to cash may not provide the protection you seek, especially over the long term.

“Consider your retirement savings as a well-tended garden. Just before winter arrives, you wouldn’t chop down all your plants and flowers to protect them from the cold. Instead, you’d cultivate the garden, prune the necessary branches, and ensure the soil is well-nourished.

“Similarly, in retirement planning, we need to ensure your investments are appropriately diversified and tailored to your specific needs.

Market crashes make headlines, amplifying anxiety among investors

“While it’s true cash can play a vital role in your financial strategy during the decumulation phase, an overly conservative approach can lead to missed opportunities for growth. Advisers can design a balanced strategy that incorporates a mix of investments, including cash, bonds and equities. This allows you to tap into your cash reserves strategically while still benefiting from the potential growth in other asset classes.”

Question 3: I’ve seen news about market crashes. Shouldn’t I move to cash to protect my investments?

“Market crashes are undoubtedly concerning events, and they often make headlines, amplifying anxiety among investors. However, reacting impulsively by moving to cash in response to market crashes can have unintended consequences.

“Think of your investments as a sturdy house. During a storm, it’s tempting to seek shelter elsewhere. However, your house is built to withstand these challenges, thanks to its strong foundation and carefully designed structure. Similarly, a well-constructed investment portfolio is built to weather market storms and has the potential to recover and grow over time.

Given the rate of return is lower than current inflation levels, this means the value of their cash is being eroded

“Instead of making abrupt decisions based on market news, focus on your long-term financial plan. The power of long-term investing lies in your ability to stay the course, even during market downturns.

“Historically, markets have rebounded after crashes, and those who remain invested have seen their portfolios recover and, in many cases, reach new heights. A diversified portfolio that aligns with your risk tolerance and time horizon can help you weather market turbulence while still benefiting from long-term growth potential.”

Gush Verdding is a chartered financial planner at Finura