With cash rates still high, they may be tempted just to hunker down in a savings account and wait for the storm to be over.
This is understandable. Savings rates still top 4%, and with inflation likely to drop below 3% in the next few months, investors are still growing their savings in real terms, albeit not very fast. Cash can provide some optionality, allowing investors to go back into the market when they feel more comfortable.
However, there are a few problems with this approach. The first is that it doesn’t provide a long-term solution. Cash is great if you have short-term financial needs, but it is a rotten way to grow your capital over time.
Over 20 years – a realistic time horizon for retirement savings – investors in a diversified global stock market fund might expect to grow their savings by around 5% per year after inflation. That compares to around 1.4% for bonds and just 0.9% for cash.
Putting that into pounds and pence, if you invested £10,000 for 20 years at 5%, you’d have a pot of £27,100.
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Reduce that annual growth to 0.9% and you’d have just £11,970. That’s a significant opportunity cost. It should make investors rethink ‘risk’ – is cash really the risk-free option when the long-term gap is so significant?
The pitfalls of market timing
Many investors will argue that cash is just a stopgap and they can go back into the market at the right time. However, that is fiendishly difficult. During the Covid pandemic, markets slumped.
Had someone managed to get out at the right time, the time to reinvest was in April 2020, long before the vaccine roll-out or any kind of recovery in economic growth. In the most recent bout of volatility, investors would have had to have the foresight to reinvest in early April, just a week after Liberation Day and long before Donald Trump had agreed a single trade deal.
That said, the choice for investors is not cash or all-out exposure to the market. No one has yet invented the fund that gives investors the giddy gains of stock markets, but without the highs and lows, but there are options for those investors who would rather have something in between. Perhaps they prefer the security of some income, or would rather not see significant volatility.
Three alternatives to cash
For example, the BNY Mellon Multi-Asset Income Fund is run by an experienced team and prioritises a sustainable and growing income, plus capital growth over time.
It has a yield of over 4%, and an annualised five-year return of 7.5% – so a £10,000 investment would have grown to £14,530. This is not as much as an investment in, say, an S&P 500 tracker, but the ride would have been far more relaxing.
It aims to smooth the return to investors by investing in a diverse range of assets. Alongside the stock market portfolio, the managers invest in Government and corporate bonds, and a range of alternative assets such as property and infrastructure. That’s not to say that it can’t go down, but it is worth noting that during 2022 – a year when almost all asset classes saw double-digit falls – the fund saw a small gain of 0.7%.
SVS RM Defensive Capital has a yield in line with most savings accounts, at 3.8%. However, it has also delivered a return of 35.7% over the past five years with relatively little capital volatility. It saw a small (5.6%) loss in 2022, but is up 7.9% so far in 2025. It invests in an eclectic range of assets, including bonds, individual shares, derivatives and investment trusts. Again, it is an option for risk-averse investors who don’t want to settle for the very low long-term returns on cash, but who are nervous about full-blown stock market exposure.
For those that like the reassurance of higher income, the Premier Miton Strategic Monthly Income Bond Fund may be an option. It has a yield of 5.7%, and has shown steady growth over time. It minimised losses during 2022 and is run by a well-established and capable management team. The fund is principally invested in shorter-dated corporate bonds, which means it isn’t as exposed to the gyrations of the interest rate cycle. Investors won’t get the go-go growth that they might achieve in the stock market, but they will get a regular income, paid monthly, and capital growth over time.
Cash has a place, but it cannot be a solution for long-term savings. If investors are nervous about stock markets in this environment, there are a range of options that should grow faster than cash, but may not experience the same volatility.
This may be a better solution for your savings than letting them fester in a savings account.
Darius McDermott is managing director of FundCalibre and Chelsea Financial Services
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’ views are his own and do not constitute financial advice.
