Why Hold Cash In Funds Despite Zero Interest?
Published / Last Updated on 08/02/2021
Given that interest rates are virtually zero and likely to go negative in the next 6 months, as warned by the Bank of England, many people ask us why they have cash funds in their pensions or investment portfolio. The argument being that after charges, the value of your cash funds may even go down and certainly with inflation, the value is eroded.
There are two prime reasons why we recommend many clients hold cash in portfolios despite this:
- Stock market funds can be volatile at the best of times and with market crashes, like we saw at the start of coronavirus lockdown, many markets fell by 30%-35%. Some fell even more. They have since recovered but if you had all of you investment in stock markets you would have suffered huge falls. Many clients do want that level of risk or volatility, so if they specify a maximum tolerance to losses of say +/- 20% pa or +/- 15%pa, then we offer a balanced portfolio usually with a mix of stock markets, fixed rate funds, index linked funds, property funds and cash funds, to bring the overall volatility down to +/- 15% to 20% pa. We accept that some markets will fall to be countered by others that will rise or hold steady. This is a balanced portfolio.
- If your pension fund is set up with flexible drawdown pension income or your investments have an income facility, then we tend to hold some of your portfolio in cash to cover the income that you are going to withdraw that year. This means that even if there was a short term stock market crash such as the coronavirus crash, then the cash is already in place to pay your income and the rest of your investments can stay in markets and not be ‘cashed in’ at a low point after the market crash. This is a structured way to plan for income without getting caught by market volatility. At the end of the year, if we are advising, we then rebalance your funds back to your risk profile level with the required amount of cash holdings for the year to come.