Partner Insight: Cash vs investing - five key points to consider when talking to clients

Gillian Hepburn
clock • 5 min read
Partner Insight: Cash vs investing - five key points to consider when talking to clients

The cash debate is a perfect example of where advisers deliver value to clients. The question of ‘should I invest in cash?' is not straightforward, but for the longer-term saver, all the data points to investing being the best option for many.

As a financial adviser, you may have clients who are wary of investing in the market, particularly now as cash savers are benefiting from the highest returns in almost two decades. You are not alone! Our most recent UK Financial Adviser Pulse Survey, revealed that 90% of advisers said they had been having conversations with clients about the relative merits of investing and cash savings products.

Here are five key points to consider when talking to clients about cash vs investing.

  1. The risks of locking up cash

While a 5% interest rate on cash might seem attractive, this comes with its own risks. These rates are usually available to investors willing to lock their money up for more than a year. By locking up their cash, clients are not exposed to assets that have a record of beating inflation over the long term and risk missing periods when investments rise sharply, which are often sudden and unexpected. Missing these periods can significantly dent long-term returns.

  1. Is your client a long-term investor?

If the answer is yes, history suggests that cash is not the place for them. If we consider US data since 1926, cash has only beaten inflation by a mere 0.3%. Equities over the same timeframe have delivered 7% above inflation on an annualised basis. The data also shows that holding equity investments for long periods can greatly reduce the chance that clients will lose money. If an investor had only invested for one month over the past 100 years, on average they would have lost money in real terms around 40% of the time. If they had invested for between 5 to 10 years, this falls to 20% and if you extend this to 20 years they would not have lost money over any period when adjusted for inflation.[1]

So if your client has long-term objectives for their money, there is a clear case for investing some of it in equities, if they're prepared to experience some ups and downs along the way. Please bear in mind though that past performance does not guarantee future performance. The value of investments can go up and down and you may not get back the amount originally invested.

  1. Timing the market is difficult

One of the most important aspects of investing is spending time in the markets rather than timing the markets. History shows that timing the market is very difficult and rarely works in the long term. At Schroders we have looked at some of the largest falls in markets and the length of recovery. In the eleven previous occasions when the US stock market fell by 25% or more, it has taken an average of 1.8 years for the stock market to recover. If clients had moved to cash in these instances, it would have taken, on average, more than double the time to recoup their losses.[2]

  1. Don't put all your eggs in one (cash) basket

Investors in a typical 60:40 portfolio of equities and bonds experienced one of their worst years on record last year. However, periods when equities and bonds lose money at the same time have been rare and we expect them to remain so. Bonds, despite being particularly weak last year, can perform two roles: diversification and income. Over the last decade, against a low and steady inflation backdrop and record low interest rates, bonds provided very little in terms of income but were a very effective diversifier to equity risk. With higher uncertainty around inflation, bonds now provide fairly attractive interest rates and can earn a relatively healthy income for portfolios.

  1. We are all inherently loss averse, especially when it comes to our hard earnt cash

It's a natural behavioural response to be loss averse; we have an aversion to losing money. However, timing the entry and exit points of markets perfectly is nearly impossible, it therefore remains important to develop long-term investment goals, build a diversified portfolio across multiple asset classes and stick to the investment plan by reducing as much of inherent behavioural biases as possible.

Clients need to be honest with themselves about their willingness to accept potential losses in their investments for the possibility of higher returns. Understanding and maintaining a financial plan set with a financial adviser is crucial.

The cash vs investing debate is an area where many clients will benefit from ongoing support.  Through discussing the question with their clients, advisers can deliver the ‘peace of mind' that they seek, as well as helping ensure their investments are in the right place to meet their financial goals.

To find out how Schroders can support you, visit our website, contact your usual Schroders' representative or call our Business Development Desk on 0207 658 3894.


[1] Source Morningstar Direct, accessed via CFA Institute and Schroders. Stocks represented by Ibbotson SBBI US Large-Cap Stocks. Data January 1926-December 2022.

[2] Source: Robert Schiller, Schroders. Monthly data 1871-2020. Data is for S&P 500 and assumes investors retained their exposure to the stock market.


Important information

Marketing material for professional clients only, not for onward distribution. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Insofar as liability under relevant laws cannot be excluded, no Schroders entity accepts any liability for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise). Schroders will be a data controller in respect of your personal data. For information on how Schroders might process your personal data, please view our Privacy Policy available at www.schroders.com/en/privacy-policy/ or on request should you not have access to this webpage. For your security, communications may be recorded or monitored. Issued in July 2023 by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority. UK006501.

Advertisement

More on Partner Insight

Partner Insight: Cash vs investing - five key points to consider when talking to clients

Partner Insight: Cash vs investing - five key points to consider when talking to clients

The cash debate is a perfect example of where advisers deliver value to clients. The question of ‘should I invest in cash?' is not straightforward, but for the longer-term saver, all the data points to investing being the best option for many.

Gillian Hepburn
clock 17 October 2023 • 5 min read
Partner Insight: Don't fall short by going passive in short dated credit

Partner Insight: Don't fall short by going passive in short dated credit

With passive funds often the preferred vehicle to gain exposure to short dated credit, we outline the pitfalls associated with this approach and highlight some of the under-appreciated benefits of being active in this space

Ben Deane, Associate Investment Director, Fixed Income, Fidelity International
clock 04 September 2023 • 8 min read
Flavio Carpenzano, investment director at Capital Group

Partner Insight: An attractive income without lowering quality

Opportunities exist though caution is advised

Gareth Jones
clock 14 March 2023 • 1 min read
Trustpilot