A financial adviser’s guide to common cash myths

As a financial adviser, one of the most common conversations I have is with clients who currently hold cash and want to make their money work harder for them.

For some, making the decision to invest is an easy one. But most of the clients I speak to, who are a bit more cautious and often hold their money in cash, find the decision more difficult.

Here are three of the most common cash myths I hear from clients and how to address them.

This isn’t personal advice, so if you’re not sure what to do, please ask for financial advice.

1. Cash is risk free

One of the myths I hear most is that cash is a risk-free asset. While cash won’t suddenly drop in value like a share can, cash shouldn’t be classed as risk free.

To explain why, it helps to firstly consider what ‘risk’ is.

In a financial sense, most people immediately associate risk with the value of money going down.

But we should be looking at it in a broader way. Investing money is where you avoid spending it today in the hope that it’ll be worth more in the future. Risk is the possibility that this objective won’t be achieved.

Let’s use an example with £1,000. You can either spend this now or invest it in the hope that it’ll be able to buy you more in the future, let’s say 10 years’ time.

If you receive 1% interest on your cash while inflation is 2%, then in reality your money’s buying power is decreasing by 1% every year. After 10 years, your £1,000 would be worth £902.56 in today’s terms.

In other words, you would’ve been able to buy more with your money on day 1 than you could’ve done in year 10.

Over the long term, investing in a diversified portfolio gives your money the best chance of growing – helping you reach your future goals. But remember unlike cash, investing means your money can fall in value, perhaps even further than by inflation, so you can get back less than you invest.

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2. The market’s volatile, it’s better to wait until it settles down

The fact is, we don’t know whether the market is currently at a high point because we can’t predict the future.

Bumps in the market affect a great many people’s investments but if they’re invested for the long term and well diversified, their portfolios will likely recover. In some cases, a portfolio may have time to recover to beyond a previous high point.

The key message is you can’t ‘time the market’ but you can give yourself as much ‘time in the market’ as possible to achieve growth and ride out the storms.

Over time, that growth may end up beating the interest you would have earned had you kept your money in cash.

Remember, investments fall as well as rise in value, so you could get back less than you invest.

3. It doesn’t matter if the fundamentals aren’t in place

Before you think about investing, make sure you have the fundamentals in place. There are a few things you can do to help you be in the best place possible.

If you answer yes to the following questions, you could be in a good place to begin your investing journey.

• Do you have at least a five-year time frame for investing, ideally longer?
• Will you have an emergency cash fund of at least three to six months’ worth of normal expenditure after you’ve invested, rising to one to three years during retirement?
• Will you be able to tolerate the ups and downs that come with investing in the stock market?
• If the value of this money drops, will your day-to-day standard of living be unaffected?

If the fundamentals are in place it’s more important to spend time in the market rather than trying to time the market. But if they’re not then you should consider holding off investing until you’re in a better place to start.

It can be difficult to know where to start when it comes to your investment journey. With so many different opinions and lots of industry jargon out there, you might feel more comfortable holding onto your cash rather than worrying about investing.

But that’s where financial advice can really help. If you feel like you’re ready to invest, and you’ve got the fundamentals in check, an extra hand could make all the difference.

Advice can give you confidence around making investment decisions. What’s more, you can be as involved as you like. Our advisers work with you to make sure your money has the best chance of doing what you need it to do. They will help you to become more confident about your finances, whether that’s to tweak your portfolio, or even a full review of your financial plans. Plus you’ll only ever pay for the advice you need.

You can get started with a free phone call with our advisory helpdesk. While they won’t give you financial advice, they’ll be able to help you decide whether advice could be right for you and provide more detail about the charges.

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