Are You Keeping Too Much Cash?

Editor's Views: Why cash is comforting in uncertain times, the magic of a new year of investing goals, and why you should be careful as Bitcoin booms again

Holly Black 8 January, 2021 | 11:08AM
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How much of your money is in cash? I don’t mean stuffed under the mattress or lost down the back of the sofa, I mean sitting in a savings account earning next to nothing or languishing in your current account . Most people already have too much money in cash and not enough invested – I’ll admit to being one of them – and that trend only intensified last year. The UK regulator found that 37% people with £10,000 of investable money have it all in cash.

Why is this a problem? Because cash doesn’t grow your money, it doesn’t pay an income, and it is not going to fund your retirement.

And while I know all of this to be true, there’s a certain comfort in cash, isn’t there? It might not make me any money, but it’s not going to lose me any either. And before you say “inflation”, well in the current environment, it’s hard to feel overly concerned about it – when inflation is high it quickly erodes the value of your cash in real terms, but when it’s running at around 0.5%, the damage is fairly limited. Meanwhile, global stock markets are unpredictable beasts, tanking one minute and hitting record highs for no discernible reason the next.

So what to do with that money we didn’t spend on holidays, meals out and other fun things last year? After all, we apparently squirrelled away a whopping £120 billion into bank and building society accounts in the six months to November 2020, up from £42 billion in 2019. Premium Bonds are a great option for cautious savers – I’ve recently bought some more, not least because I enjoy convincing myself I’m going to win the jackpot each month. If you’ve got any debt, now is the time to pay it down and we’ve got a handy video on how best to do that here. And if you’ve already cleared the credit card, making mortgage payments is another option.

And do consider investing. I’ve finally bitten the bullet and set up that monthly investment plan, so I’ll now be adding small amounts to three of the funds in my portfolio automatically. That feels a bit daunting at a time when three US indices just hit record highs and the outlook for the UK economy is bleak, to say the least. But I’m putting my faith in the theory that the scariest times can be when the best gains are made and following the other piece of advice I regularly extol: invest it, log out, and don’t look.

2021 Vision

“It’s the most wonderful time of the year” was written about Christmas, but for investors I think January is the most magical period. This is the time we can make over-confident predictions about what will do well in the coming months, crow about our successes of the previous year, and pretend the less successful ones never happened.

This week, we’ve heard from our analysts about the outlook for China, why banks and big oil could thrive in 2021, and what the big themes in ESG will be in the year ahead. We spoke to one investor who saw a shareholding rocket by 700% and have looked at YouGov, whose share price is up 2,200% over a decade.

My most successful holding in 2020 was, unsurprisingly a tech-focused fund, but it’s the gold ETF which finally went into profit I feel more gratified about – though now I wish I had stuck with it a little longer rather than quickly hitting the sell button out of pure relief. Weakest among the pack has been a frontiers investment trust, but I am convinced it will come good in the end.

As for the year ahead? My investment portfolio is 27% UK equities (no home bias here!) and almost 50% international equities and the funds in my new monthly investment plan are focus on Europe, Asia and global markets respectively – so that probably tells you where I think the opportunities are. Hopefully there will be plenty of chances for crowing this time next year.

Be Wary of Bitcoin

Is anyone else frankly terrified by what’s happening to the Bitcoin price at the moment? At Morningstar we try to avoid talking about speculative asset classes such as this, because the price is driven by supply and demand – or more accurately, fear and euphoria – rather than any investment fundamentals. But it’s hard to ignore the cryptocurrency when it has just hit a new record high of $35,000, having seen its price triple in just three months.

Gains such as these invariably capture attention and people want in. If that's you, that's fine, but do go into it with your eyes open - investing in anything when it's at a record high is rarely a recipe for success. Personally, it makes me want to run for the hills.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk