Three in ten (30%) UK investors moved into cash in the past year because of high interest rates, according to research from St. James’s Place.
This compares to 12% who increased their exposure to equities during this time, and 12% who invested more in bonds.
Looking forward, SJP’s research found that almost a quarter of investors (23%) plan to make additional investments in cash over the next year if interest rates remain high.
This contrasts with 14% who plan to invest more in bonds and 13% who plan to increase their exposure to equities.
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The wealth manager surveyed 1,000 UK investors shortly before the Bank of England’s decision to cut interest rates for the first time in four years.
SJP’s analysis indicates those shifting into cash to take advantage of higher rates were not necessarily making the right call.
Examination of the performance of equities, global bonds and cash over the past 20 years found that remaining invested in markets delivers better long-term outcomes than increasing cash holdings, SJP said.
Since 2004 equities have seen a cumulative return of 566% compared to the 96% delivered by global bonds and 43% by cash.
SJP research also found that large-cap stocks have consistently provided returns in excess of inflation over the past 5, 10, 20 and 50 years, while cash has only just delivered a return of 1% in excess of inflation when looking over the 50-year time period, compared with 8% delivered by small cap stocks, 4% by corporate bonds and 3% by government bonds.
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Nina Stanojevic, senior investment specialist, St. James’s Place, said: “August’s interest rate cut to 5% marked a pivotal moment. We foresee more cuts but not a drop to near-zero levels. Rates will likely stabilise above pre-pandemic levels.
“This ‘higher for longer’ trend affects asset classes differently. While cash has been attractive with high rates, as our analysis shows, inflation erodes its value over time, potentially hindering long-term goals. Investors should use this rate cut as a wake-up call to diversify and consider higher-yielding assets such as equities and bonds.
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“While recent market volatility may understandably be a cause for concern among investors, the current opportunity to “buy the dip” and get back in the markets at a time when prices are relatively low, provides a good re-entry point for many,” she continued. “Ultimately, investing is for the long term and it’s important not to get too caught up in trying to time the market, and instead keep focused on your long-term goals.”
