From the coronavirus pandemic to talk of a potential no-deal Brexit, 2020 has been a tumultuous year. It has affected all of us in a number of ways – emotionally, physically, and financially.
When it comes to how it has impacted us financially, Andrew Hodson, our Director and Head of Investment Services, tells us: “income that typically was quite attractive from dividends has dropped considerably. Interest rates are historically low and, when it comes to short dated government bonds, you may be paying to hold them.” He also adds that the Bank of England has discussed the introduction of negative interest rates and that it has “yet to discount this happening.”
In times where interest rates and yields are low and investing feels riskier than ever, what can you do to preserve and grow your cash?
Is cash a risk-free asset?
Many individuals – whether they are risk averse or looking for more security in uncertain times – assume that cash is a risk-free asset. Andrew tells us that this is not the case: “In the current environment of almost zero interest rates, inflation will erode the purchasing power of your cash.”
To hold cash, however, you do not have to be risk averse. You might be setting it aside:
- After a liquidity event; for example, selling an asset. Following on from the sale you may find yourself with cash set aside to pay an upcoming tax liability (if you made a profit on the sale) and with cash left over to redeploy as you wish.
- As an emergency fund to allow you to maintain your current lifestyle should you unexpectedly lose income or have to pay an unforeseen expense.
- To buy a new home.
- After you come into money via a gift, an inheritance or a settlement.
- When you are phasing money into the market over a certain period of time.
Regardless of the reason why, Andrew tells us that when you simply ‘sit’ on your cash, “in real terms, you go backwards over time.” It is therefore important to ensure that your cash is as productive as possible; if investing is not an option, you should – at the very least – be looking to secure the best interest rates.
How to preserve and grow your cash in uncertain times
Find the best interest rates
Andrew suggests using a cash management service to quickly and easily monitor interest rates across a number of banks and building societies.
“Our cash management service, powered by Insignis Cash, gives you access to over 20 banks – including challenger banks and NS&I – through your own personal online account. You can quickly and easily view all of the available variable and fixed rates and browse Fitch credit ratings for each financial institution. Consolidated interest statements will be compiled for you for tax purposes, helping to further reduce the administrative burden of managing your own cash. Accounts are also available to trusts, charities and companies.”
Using such a service will make it easier and faster for you to find the best rate of interest. It will also reduce the administrative burden of managing your own cash. What it will not do, however, is change the fact that interest rates are historically low.
To secure the best possible rates, Andrew suggests considering challenger banks. “Their credit ratings might not be as good as that of the big high street banks, but the flipside of this is that they are often prepared to offer better rates to attract deposits.” While he strongly recommends thoroughly assessing risk, especially for banks with anything less than an A rating, he states: “as long as your deposits are spread across a number of banks and you stick to a limit of £85,000 per financial institution, then you will be within the protection of the Financial Services Compensation Scheme (FSCS).”
How our clients are using our cash management service
Cash management services are an integral part of a robust financial planning strategy, but how exactly are our clients using it to maximise their interest income?
“For clients who have had a liquidity event and have a tax bill, we use the cash management service to find a bespoke rate to mature on the day that the tax bill is due,” Andrew reveals. “For those taking a long-term view and eager to put money into the market, may want to phase their investment, especially in such unprecedented times. In this case, the cash management service gives them a place to park their money and, as rolling deposits mature, invest into the market.”
The cash management service is also increasingly used by clients who require an income from their investments which is not being met due to the fall in interest from bonds and dividends from companies. In this scenario, Andrew states: “I suggest taking out up to 2 years’ worth of income and let the balance of the investments focus on growth. The cash can then go into the cash management service with rolling maturities to make cash available periodically to cover expenditure.”
“If a client is rolling money on a 3 or 6 monthly basis or they have a series of deposits, then we will continually monitor the market,” he explains. “Before maturity, we notify them if we can get a better rate, then they can roll their cash into another institution.”
Consider low-risk investment options to beat low interest rates
If savings interest rates are not going to give you the return that you want and need, but you are not ready to consider investing in stocks and shares, low-risk investment opportunities could be a suitable alternative. Although low in risk, you must be aware that, in some cases, the options outlined below may not generate a return. Before making any decisions, we recommend seeking tailored investment advice.
Fixed income investments versus structured deposits in the current market
When it comes to fixed income, Andrew points out that right now, it is“not looking particularly attractive.” Structured deposits, on the other hand, “are generating potentially much more attractive rates of return compared to traditional savings products, but there is a trade off as the payment of interest is dependent on the performance of an underlying stock market index, such as the FTSE 100.”
Andrew reveals: “Here, the worst case is that you get your capital back.” He recommends “taking a 2 to 3-year view; if you think the FTSE 100 is going to be higher than its current level, then you might be able to get a 6 – 7% coupon, equivalent to 2% or more a year. This is much better than what you can get on deposit in a savings account. If, however, the FTSE is lower at the end of the term – you will get your capital back, but no interest.” It is also important that you consider the credit rating of the financial institution issuing the structured deposit.
Seek tailored investment advice from a qualified and authorised investment adviser for tailored investment advice
There are higher risks involved in investing, particularly when it comes to options like stocks and shares. However, it may be the right course of action for you if you are:
- Taking a long-term view;
- Comfortable with a higher level of risk;
- Keen to potentially achieve higher returns and dissatisfied with current interest rates and low-risk investment options.
“If you go into anything that has a market price, you have got to understand that the price can go down as well as up,” Andrew comments. That said, “if you have money that you can invest for the long-term and you invest in good quality companies – market leaders with strong balance sheets and cash flows – they should pay decent and growing dividends.”
With a wealth of experience in investing and interrelated financial issues, our team of advisers can provide you with options that are fully tailored to you, your financial goals and your risk profile. A number of steps can and will be taken to help you mitigate risk wherever possible, working alongside you to continually review – and enhance – your portfolio’s performance.
Protect and grow your cash with bespoke, independent financial advice
Contact our London or Nice office to discuss your situation and your financial goals with a member of our advisory team.
Strabens Hall Ltd is authorised and regulated by the Financial Conduct Authority (“FCA”). Our FCA registration details are set out in the FCA Register under firm reference number 461795 (www.fca.org.uk). Strabens Hall Ltd is registered in England and Wales (registered number 06015275) and our registered office is 5 – 9 Eden Street, Kingston upon Thames, Surrey, United Kingdom, KT1 1BQ.
Some of our services are not regulated by the FCA. Before you engage us in any work, we will outline which of those services are and are not regulated by the FCA to enable you to make a fully informed decision.
The Financial Ombudsman Service (FOS) is an agency for arbitrating on unresolved complaints between regulated firms and their clients. Full details can be found on its website at www.financial-ombudsman.org.uk.