What’s the point in investing in cash – and do you hold too much?

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The idea of having too much cash is something that fits firmly in the bracket of first world problems, as the internet catchphrase brands the worries of the privileged.

Yet, while the issue of having too much unproductive money sat around is unlikely to win anyone much sympathy, it is something of a problem for our collective wealth.

Although many people in society have almost no savings at all, on the other side of the divide it’s regularly suggested that those who do have a decent savings pot keep too much of it sat in cash.

And this has been put back on the agenda for investors with a warning that inflation could reach 4% next year – as the fall in the pound hits – arriving from the NIESR.

Investors should put their spare cash to work, says one investing expert, but what counts as spare cash?

Needless to say, if that happens it spells bad news for our money.

After all, if we’re struggling with both inflation and best buy savings accounts at 1% now, a considerable rise for inflation with no likely corresponding rise in interest rates looks bleak.

Short-term we can live with this, but if the situation sticks for longer the effect compounds – and that erosion of value stops cash being the safe asset we like to think of it as.

‘It’s the invisible threat to cash that is a concern,’ explains TD Direct Investing’s Michelle McGrade. ‘When prices start to reflect rising inflation, which is already happening, cash won’t buy as much. If savings don’t grow to reflect this rise in prices over time, in effect savers will be losing money.’

She says that investors should look to invest more of their spare cash.

That’s not a surprising sentiment from someone working for an investment platform, but what we know about long-term financial history indicates it to be a wise suggestion.

If you had invested £100 in the UK stock market in 1945 it would have been worth £179,695 by 2015 with dividends reinvested, compared to £6,261 if saved in cash, according to the Barclays Equity Gilt study.

But what counts as spare cash and what’s the point in holding cash at all?



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Firstly, spare cash is not the stuff you need for emergencies.

Life has a habit of throwing big bills our way. Good financial planning says that you need cash at hand to fund a new boiler, replace your washing machine that’s making that odd noise, or pay a gut-wrenching bill from the garage for a new clutch.

A pot of cash is your buffer against rainy days like these.

Furthermore, money that you might need short-term also doesn’t fall into the spare cash bracket.

Michelle points out that this includes things like savings for a property deposit in the near future. It’s tempting to invest that for a quick gain, but if the market falls 10 or 20% – as it can easily do – you would face a major setback.

‘In the short term, markets can be volatile and the last thing a house buyer needs is the value of his or her investments to be lower just at the point that they want to use them,’ she says.


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There is also one final defence of cash to mount – and one often given as a good reason for holding it.

Cash gives you protection and options. Some money parked safely on the sidelines will hold its value when the stock market inevitably does fall, and provides ammunition to buy in cheaper at those knock down prices if you’re brave.

The difficulty for us investors is weighing up the opportunity cost of keeping that cash sat there in reserve, when it could be out there working harder invested.

Even after considering all those very good reasons for holding cash, however, many investors would probably find that a good look across all their investments, savings and other wealth would highlight that they have too much in cash.

I consider myself a pretty adventurous investor, willing to use the fact that time is on my side to support a strategy that takes aim at stock market growth around the world.

Yet, when I add up various savings accounts, bank accounts and my premium bonds and compare it to my Isa investments I’m about 40% in cash.

Beyond the rainy day fund that I need, there’s money there that could be working much harder even if it was simply in a global tracker fund or decent income investment trust.

The problem is that saying you hold too much cash and doing something about it are two very different things.

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