Money. It’s the thing that we used to carry around with us to buy goods with but increasingly is barely even accepted anymore. You remember. Cash.
But I am not here to discuss the lack of ATMs, the cashless economy or the rise of online banking scams. I will leave that to other personal finance sites.
Here at Trustnet we are interested in cash for one reason only: as an investable asset.
For most of the past decade, holding your wealth in cash was a laughable idea. With interest rates so low, some banks and building societies were not paying interest at all, while locking money away in fixed-rate bonds would barely have made you enough to buy a coffee at the end of the year.
Now, however, the landscape has shifted. Watching the Martin Lewis Money Show this week, the Money Saving Expert founder explained how and when to use cash ISAs versus ordinary savings accounts.
In this segment he suggested that the base for all decisions should be what savers can achieve in an instant access account. After all, up to £85,000 and the cash is guaranteed to be returned under regulations by the Financial Services Compensation Scheme.
This should be the same in investing. If you believe that you can make more money from markets over the long run (which historically you have done) then it is the right investment for you – providing you can accept the risk. But it should not just be the risk averse that is taking a strong look at cash options.
Over the past decade, investors have had a fantastic time. The MSCI AC World has made investors 11.3% per year, while the MSCI USA has been even better, making 14.3%.
Yet, it has not been as plain sailing everywhere else. The FTSE All Share, for example, made 6.6% per annum and the MSCI Emerging Markets made 6.5%.
There are also strong debates as to whether the types of returns made by global or US markets are repeatable over the next decade, with inflation and interest rates rising.
The long-run average of markets tends to trend closer to where the UK and emerging market indices have performed over the past decade.
With all that in mind, let us look at cash rates. The top easy access saver, which Lewis said should be the benchmark for all options available, is from Earl Shilton Building Society and pay 2.85%, while the top easy access ISA – Virgin Money – pays 3% per year.
This rate is already half the historic returns made by the worst-performing markets over the past decade. Locking cash away for longer, the top two-year rate from Union Bank of India now pays 5%, almost the same as some of the worst-performing markets.
Of course, some investors will point out that these still pale in comparison to the returns from the US and global equities, which is true, but these returns were made during a time of ultra-low interest rates and accommodative conditions that may or may not repeat.
But you don’t need to just take my word for it. Duncan MacInnes, manager of the Ruffer Investment Company, said that the firm currently has the highest weighting to cash or cash-like assets in its history.
“After a spectacular couple of decades for asset owners, markets are undergoing a regime change. Part of this is a vicious reappraisal of discount rates and term premia,” he said.
With markets as volatile as they are currently, he argued that holding cash is not just about getting the guaranteed returns, but is “an acknowledgement that tomorrow’s opportunity set could be more fertile than today’s”, while from a behavioural sense, investors will be “unencumbered by the pain of nursing hefty losses”.
While investing is likely to remain the best way to save over the very long term, there appears at present to be a compelling reason to head to cash, should investors wish to.