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Chart of the month: The siren song of UK cash rates
Domestic cash rates have risen sharply, so should investors shelter from the volatility of other investments? Our latest chart shows that many Brits believe cash is becoming more appealing.
With UK cash rates around 5%, why not avoid the volatility that comes with stocks? And with short-term rates higher than longer-term rates, why lock up cash in a long-dated government bond? It’s easy to sympathise with this sentiment, and we’re hearing it frequently in client conversations, particularly with last year’s significant falls in stock and bond prices still weighing heavily on investors’ minds. However, we believe shifting to a much larger cash holding in a portfolio could prove costly.
As shown in the chart, the percentage of Brits finding cash appealing is increasing with every Bank of England base rate rise. It’s not a new phenomenon that clients are attracted to the smooth, stable nominal returns of cash and investors are not alone in finding cash rates tempting at this current time. We have always seen cash as an important part of our portfolios for liquidity purposes and note that it has the potential to help insulate portfolios from ‘tail-risk’ events, as often in these scenarios cash is one of the few asset classes which holds its value, at least in nominal terms.
However, holding too much cash can expose investors to inflation risks, and also comes with a potential opportunity cost over the long term as it is hard to lock in cash rates. There is a reinvestment risk; while high rates may be available today, the rates available could be much lower again in the future when it comes to reassessing where to invest that cash.
Look out for a future blog on why we believe many investors may wish to resist the siren song of cash and stay invested in asset classes with greater longer-term potential.