Older clients told to ignore calls to stay 'fully invested'

Warned continually about the paucity of returns on cash balances in Isas and savings accounts, some older clients are reluctant to hold money aside for a rainy day.

Instead in some cases they are being advised to have all their money invested and so earning returns for them at all time.

The issue is intensified by the vast sums being accessed by the over-55s via pensions freedoms, which needs to last them in some cases 30 years or more.

But Nigel Chambers, co-founder of CTC Software, which provides financial modelling software for advisers, warned.it is important to have some ready money to pay for immediate needs.

He strongly advocated having "at least the next two years' worth of money in cash.

"What if markets go down in the short-term? What if they need some ready money? There has to be a balance of risks."

However he acknowledged the dangers of the flipside - having too much money in cash - were also real.

 "I agree people are not always drawing down their money wisely from their pension, and merely putting everything into a bank account," and in this age of 0.25 per cent interest rates, and 2.9 per cent inflation, such a move was unwise.

This should be balanced against the reduction in the portfolio’s potential returns. Jonathan Cooper

In September, research from life and pension provider LV=, carried out by YouGov among nearly 9,500 UK adults, found the majority have not been able to save enough.

According to the study, 59 per cent of people in so-called Middle Britain - those who are married or in partnerships, with two children and gross household earnings of £35,000 - fall short of the Money Advice Service’s recommendation to have three months’ worth of outgoings in the bank in order to cope with a financial shock.

Jonathan Cooper, senior paraplanner at Drewberry, said increasing cash for some portfolios may well be a valid option, "especially if there are to be known outflows, but this should be balanced against the reduction in the portfolio’s potential returns".

"The liquidity risk can be managed to a degree by seeking 'safer' fixed interest assets be they government gilts or corporate bonds with top credit ratings.  

"Again moving away from riskier debt allocations, such as long dated and high yielding bonds will come at the cost of potential future returns.

"The portfolio allocations should be focused on the client, their needs and risk appetite – including liquidity risk."

Philip Milton, founder of Barnstaple-based PJ Milton & Co, said he attended a conference in September where the consensus on bonds being poor value seemed to be growing.

"People are paying bond managers and getting negative returns as a result.

"We have sold down high-yield bond holdings in the portfolio, which was a big decision as it had been part of a defensive strategy for clients, but they were starting to cut their dividends."

While he is not increasing cash per se, he said the team was looking into alternatives, such as gold, a small holding in an oil exchange-traded fund and even reverse exchange-traded funds to take advantage of the currency movements between the US dollar and sterling.

He added people do not realise they have a guaranteed capital loss with government bonds, believing falsely they have safe and secure holdings.

According to Mr Milton, the ordinary person should have a sufficient cash pot, based on their own expenditure and income, to cover any emergencies or short-term capital requirements, such as a holiday or fixing the car.

Their comments come after Marcus Brookes, Schroders' head of multi-manager, advocated ditching government bonds in favour of a positive cash holding within portfolios. 

He told FTAdviser that, in terms of diversifying a portfolio, it would be better to hold cash within a wider equity portfolio, and wait until bonds look more attractive before buying them back.

"Cash for me is in lieu of bonds", he said.

simoney.kyriakou@ft.com