Royal London’s latest policy paper – ‘The curse of long term cash’ makes interesting reading. While it accepts the benefit of cash as a short-term buffer against unexpected expenses or market volatility it is critical of cash investments (such as cash ISA) as long term investment vehicles.
Whilst there are various different types of ISA (Cash ISA, Stocks & Shares ISA, Junior ISA etc) the Cash ISA is by far the most popular. Royal London estimates ‘in 2015/16 nearly three quarters of the £80 billion invested in adult ISAs went into Cash ISAs’.
The Royal London document compares cash investment with multi asset funds where a multi asset fund may contain a range of asset classes including bonds, equities and cash. The document states ‘£1000 put into a deposit account 10 years ago would be worth less than £900 in today’s money. £1000 put into a simple multi asset fund would have been worth more than £1500 in today’s money’
Given rising UK inflation and the current economic picture (including Brexit) Royal London expects the returns from cash investments to fall further in the medium term rather than improve. The position for the individual investor, of course, depends on the number of cash investments they hold relative to other asset classes.
So why do Royal London suggest the direction of public policy which is moving from pension to ISA? There could be a number of reasons. General mistrust of financial services organisations due to past scandals and the perceived cost of professional advice and investment management fees may all have an impact.
Ease of access to funds in a cash ISA may also be perceived as an advantage over pensions. Funds held as cash may be intended to be short term but may actually sit in an account for many years.
Short term market volatility with month to month or year to year fluctuations (sometimes significant) in the value of invested funds can make those who are risk averse assume cash is a safe haven. A lack of understanding of the long term nature of investment can lead the unwary to believe cash compares favourably with appropriate investment in multi asset funds.
Ultimately what is required is a balance between cash and other assets groups and a long term view of investment returns. Historic performance of any asset class (or portfolio), be it 10 years, 20 years or more, can at best only act as a guide and is no guarantee of future performance. Any investment, be it in one or more asset classes, requires ongoing review and management.
The purpose of this blog is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice’ and ‘Past performance is not necessarily a guide to the future. You may not get back the full amount of your investment’.