You are here: Home - Investing -

Investors sit on cash despite being the least rewarding asset class

0
Written by:
15/10/2012
The average UK investor is holding a third of their portfolio in cash, despite the corrosive effects of inflation and interest rates remaining low for over 40 months.

According to research by Investec Wealth & Investment (IW&I), just over a quarter of adults now have half or more of their assets in cash while one in ten are invested entirely in cash, as uncertainty over the state of the UK economy continues to make investors risk-averse.

However, IW&I warns that cash is by no means a risk-free solution: assuming the current rate of inflation, £10,000 today would in real terms be worth just £9,061.73 in five years’ time and £8,211.49 over ten years.

Despite this, the majority said that over the next 12 months they plan to maintain or increase their cash holding.

Chris Hills, chief investment officer at IW&I, said: “Our research suggests that cash may be viewed by many investors expecting further market dislocations as the least worst option right now but with fear dictating investor sentiment it would be wrong to ignore buying opportunities in the stock market.

“Companies are in pretty good health, so if the issues in the Eurozone are resolved satisfactorily we could see a decent rebound in the market. Recent actions by both Mr Bernanke in the US and Mr Draghi in Europe indicate that the authorities are intent on supporting markets and preventing a loss of investor confidence.

“But if there is a disorganised break-up of the Euro or defaults from Greece and beyond, the UK stock market could suffer a material setback. So while equities look cheap, they could still become quite a bit cheaper.”

IW&I’s research shows that 61% of investors who increased their cash allocation over the past year were driven by the need for safety and a fear that investment products would fall in value.

Only 9% of investors increased their allocation to equities and other investment products.

Investors’ aversion to risk is causing a flight to safety, but IW&I recommends investors also consider the UK stock market, which at a P/E ratio of 11 is looking cheap relative to history.

 

Analysis also shows that the stock market has generated the best returns over a subsequent ten-year timeframe when the P/E ratio was between eight and 12. However the worst years to invest were when the P/E ratio was between 17 and 25.

Hills continued: “Investors with particularly large cash holdings should think twice about this strategy over the longer term.

“It’s important to get the balance right between asset classes and we would argue that for most investors there is a strong argument to maintain a diversified approach including equities, bonds and alternatives.

“It should be remembered that cash has been the least rewarding asset class in the long term.”

According to the survey by IW&I, of those investors that increased the proportion held in investment products, over half (54%) said they opted for low risk investments that have a potential to pay more than cash, while 17% invested in riskier assets like stocks and shares in the hope of a higher return.

Related Posts

Tag Box

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Five ways to get on the property ladder without the Bank of Mum and Dad

A report suggests the Bank of Mum and Dad is running low on funds. Fortunately, there are other options for st...

The essential Your Money guide to the April 2018 tax changes

As we head into the 2018/19 tax year, a number of key changes take place to existing policies while some new i...

A guide to switching energy provider

All you need to know about switching from one energy supplier to another.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week

Read previous post:
Brits save for rainy day despite seeing incomes rise

The average household income rose £69 per head from April to June after the effects of inflation was taken out,...

Close