Why cash may not be king for long
By: Tim Bennett
24.01.2019
Cash beat most other asset classes in 2018 for the first time in years. Tim Bennett looks at why and weighs up the likelihood of a repeat.

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Why cash may not be king for long

In 2018, something very unusual happened – cash came out top of the pile of investment asset classes after a volatile year in the stocks and bonds markets. So, what happened and are we likely to see more of the same going forward?

Background

2018 was quite a rollercoaster year in major markets around the world. The result?
To put this in context;
The key question is; how likely is it that cash will remain king? History suggests the answer is; not very.

A rare win

Whilst the past is no guarantee of the future, cash has rarely beaten stocks and bonds, especially over long-time horizons.
You may further note from the first slide that, over 30-year periods, cash has failed to match either the highest, or lowest, returns from stocks according to Barclays. So, investors should be careful about reading too much into last year’s result.

Low long-term returns

Clearly there is a place for cash when it comes to setting up emergency funds, to cover a “rainy day” or meeting short to medium-term calls on capital, such as weddings, house deposits and school fees. Beyond that though, cash has shown itself to be something of a performance laggard when it comes to building lifetime savings.

Volatility is not your enemy

Part of the problem, when it comes to “trusting” shares is volatility. Whilst it is disconcerting to see share prices fall, the truth is that up and down trends are part and parcel of long-term investing. The fact they happen is much less important than the approach you take to them. Without them, the superior long-term returns available historically from shares would simply not have been possible.
The key is to recognise that short-term volatility could impact your ability to fund a commitment and plan accordingly by moving enough money out of equities at the right time.

Conclusions

We all need some cash over the short-term but for long-term investors cash is a poor store of value. Rather than worrying about short-term volatility, or wasting time trying to predict when we will get some and how long it will last, a better bet is to plan properly so that the impact is minimised.
To discuss any of these points in more detail, please contact an Investment Manager.