Cash isn’t always king

Cash accounts are susceptible to inflation, which means that money will lose value over time if it is not invested in something else with an expected positive return on investment. 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.

During periods of stock market volatility it is totally understandable that cash feels safe, and can be looked upon as a security blanket of sorts. But in the long run, it can do more harm than good to your financial well-being.

Negatively impact on returns

Every investor needs a cash buffer in case of emergencies, but too much 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 investment 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.

Potentially higher returns

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 do not know where to begin investing, it is 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 its purchasing power over time.

Indexed for inflation risk

This is particularly acute when 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. There are some investments that are indexed for inflation risk. They earn more when inflation goes up and less when inflation goes down, so your total earnings are more stable.

Investing does, of course, carry its own risks but a well-structured and well-diversified portfolio, tailored to your individual requirements and managed sensibly, ought to protect your 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 thus promote growth.