Why you should consider holding investments rather than cash

  • Shunil Roy-Chaudhuri
  • 23 March 2023

We are all familiar with cash. We may have our wages paid in cash. We may receive benefits paid in cash. We buy things in cash. We hold cash in our bank accounts.

We understand that if you hold £10,000 in a high-interest paying account, it will grow above £10,000. And, as long as you don’t draw money out of the account, it won’t fall below £10,000.

So we know where we are with cash. Or at least we think we do.

Inflation reduces the real value of cash

Unfortunately, while the numerical value of £10,000 cash held in a bank account may remain static, the amount you can buy with that cash does not. This is because prices of the goods and services we pay for have a habit of going up over time, an effect we all know as inflation.

For example, £1 would have bought you 20 pints of milk (at 5p each) in 1975, but can only buy you one pint (at 69p) today.* This shows how inflation can lead the real value of cash to dwindle over time.

Interest rates are often lower than inflation rates

Inflation wouldn’t be a problem for cash holders if the interest rate on their bank account matched the inflation rate. Unfortunately, the interest rate on cash accounts is often less than the inflation rate.

You can see this in the chart below where, over the long term, the rise in cash has been beaten by the rise in inflation. This means the cash holdings would buy fewer goods and services over time, leaving cash holders worse off.

Performance of SPW’s PDPS portfolios versus cash and inflation

Source: FactSet, Schroders Personal Wealth, 14 March 2023. PDPS performance prior to 1 June 2019 reflects the Investment Portfolio Service managed by Lloyds Bank plc. Returns are net of underlying fund fees and charges and gross of SPW fees. Cash is represented by SONIA Overnight rates; inflation is represented by the Retail Prices Index (RPI). These figures refer to the past and past performance is not a reliable indicator of future results.

Historically Schroders Personal Wealth portfolios have beaten inflation

But investors holding any of the Schroders Personal Wealth (SPW) PDPS portfolios since their 2004 launch would all be better off today. This is because their long-term performance has beaten both cash and inflation, although past performance is not a reliable indicator of future results. Moreover, the value of investments, and the income from them, can fall as well as rise and aren’t guaranteed, and the investor might not get back their initial investment.

The SPW PDPS portfolios invest in a blend of investments, ranging from generally lower risk government bonds to higher risk shares. The lower risk SPW portfolios hold a larger proportion of lower risk assets than the higher risk portfolios. Three of the SPW PDPS portfolios are shown in the chart. The Cautious profile is our lowest risk portfolio, Balanced is our mid-risk portfolio and Dynamic is one of our higher risk portfolios.

The chart shows that, over time, the higher risk portfolios have performed more strongly than the lower risk portfolios. But they have also undergone greater swings in performance.

The fact that all of these portfolios undergo performance swings can, quite understandably, be a concern for many of us. But good financial advisers have experience of working with investments and understand how they could potentially help you improve your financial position over the long term.

A financial adviser can help you choose a portfolio that’s right for you

Good financial advisers are also able to identify which blend of investments matches your unique requirements and, hence, which portfolio might be right for you. They can do this by considering your investment needs from the perspective of your financial requirements as a whole, including how much cash you may want to hold as a rainy day fund.

Investing in the markets can be daunting for many of us. But a good financial adviser can guide you on your investment journey and provide support and reassurance where needed.

Source: *Office for National Statistics, ‘RPI: Average price - Milk: Pasteurised, per pint’, 15 February 2023.

Important information

The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors might not get back their initial investment.

There is no guarantee by investing money it will keep level or beat inflation, particularly when inflation is high.

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or part) without our prior written consent.

In preparing this article we have used third-party sources which we believe to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents in relation to specific situations and particular circumstances.

Cash savings and investments are protected to the value of £85,000 per person per institution by the Financial Services Compensation Scheme (FSCS). However the value of investments may fall as well as rise.

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