Cash: The undervalued asset class

Clients often ask us about what they should do with the money they hold in cash in the bank. Usually, they are frustrated with the low rates of interest that they earn. However, more often than not, we will advise them to keep their cash in there.

This often takes clients by surprise. But for us, financial planning is far more than just achieving the best possible returns. Building an overall financial plan for our clients is about matching their investments and assets to their financial objectives. Most clients want to minimise the risk in their plan and not to stress about it, at least for now. Living life is far more important than being concerned that the FSTE has dropped 2% because we are all off to the ballot boxes again!

We generally recommend that all of our clients hold 3-6 months income in cash. Why? Because it’s essential that every client has an emergency fund, which can be accessed very quickly. If an emergency occurs, they don’t want to be worrying about how they’ll pay the bills. This also allows clients to take a longer term view on their investments, and potentially take more risk to offer the potential for higher returns.

Cash as an asset class is also far more important for clients heading into retirement. With the lack of value in annuities at the moment, more and more clients are continuing to invest their money and ‘draw down’ on the capital when they have stopped working. Now, the benefit of an annuity is that it gives you a guaranteed income for life, whereas drawdown comes with more risk and the very real possibility of you running out of money before you die. So using cash as an asset class to mitigate some risk in retirement can be very valuable.

When you are working, you know money is coming in every month from your wages, so you can plan what to save for your retirement. In retirement it is reversed; you need to plan what to spend, which can be very difficult, especially if you are relying on investment returns for part of your income. Therefore, for clients in drawdown, increasing cash holdings to three years’ worth of income will provide that extra safety net for their retirement plan.

For some clients who have benefited from an unexpectedly good year for investment, we have recommended they take profit from the investment and hold more cash for them to use when the markets drop, as of course we all know they will. Using this extra cash holdings for income when markets are down, allows lifestyles to continue unaffected by market conditions, and allows the market time to recover before clients needs to access their capital.
Cash will always be an asset that loses money in real terms, but it is the building block of every financial plan. When reverting back to clients’ objectives, piece of mind and protection of their intended lifestyles is always high up on their priorities, therefore financial planners should never underestimate the real value of this asset class.