Long Read  

The importance of cash in spite of inflation

“Nothing does what cash does. It provides access in an emergency, helps one sleep well at night, and stops an investor being a forced seller in a bad market. It buys time and peace of mind.

“In general, we like clients to retain cash deposits for known expenditures, peace of mind, and contingencies. Once we feel that is covered, then cash has a limited part to play.

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“And for clients who are accumulating their wealth over the longer term, inflation today is less of a problem, assuming it is transitory.”

The clients with limited concerns

Stewart Sanderson, senior private client director at Brooks Macdonald, says the company's clients are generally focused on making sure that their cash is “working”, regardless of the macro environment.

“Allocations to cash are often for a set purpose, such as to top up income, a planned house renovation or similar expense.”

Mike Stimpson, partner at Saltus, also says that with rates at historical lows for so long, most of his business's clients do not hold significant proportions of their assets in cash.

Instead, many have investments in real assets that tend to be less affected due to physical limits on their supply, such as property and gold.

“Anyone who owns property will know of the long running ability of that asset class to grow returns above the general rate of price increases, while commodities also have long track records of usually, but not always, outperforming in inflationary environments.”

Hatfield says clients are showing greater awareness that investing in good quality companies and real assets has the prospect of beating inflation.

“Those investments participate in the real economy. Cash, unfortunately, does not.”

But Hatfield adds that the business is wary of clients "over-investing".

“While inflation might be more of an issue now than normal, so is market volatility. 

“As clients transition from accumulating their wealth during their working lifetimes to decumulating their wealth in retirement, cash has such an important part to play – as a short-term store of spending money, and to help people ride out market difficulties, preventing them from having to access money from investments at an inopportune time.”

Chloe Cheung is a features writer at FTAdviser