A common saying used for decades throughout the investment world is ‘Cash is king’. Without cash, a functioning society would collapse - there would be no money to pay for purchases, to settle debts or keep as a liquid asset for when times are tough. As a result, many people will always view cash as king for as long as money makes the world go round. But lately, the crown cash has so proudly worn has been slipping, brought about by rampant inflation, rapidly diminishing its purchasing power.

With base rates in the UK now at levels not seen for 15 years, many high street banks are currently offering fixed-term savings accounts in excess of 5% interest. This is a far cry from the previous decade or so when cash offered savers next to no interest growth. But with the Bank of England making 13 to 14 consecutive base rate increases to help slow rampant inflation, we’re finally seeing cash become a viable option for savers - especially in light of the recent volatility experienced in the financial markets.

However, with even the most competitive rates offered on the high street still typically trailing inflation, this begs the question, is locking into a rate that provides losses in real terms a satisfactory outcome to avoid the short-term volatility of financial markets? History unequivocally tells us no.

Of course, each savers’ circumstances are different. But the justification for holding cash over investments, especially over the longer term merely because savings rates are increasing, is a flawed one.

The certainty offered by cash lies only in its nominal value, with £100 today still acting as £100 in future years. However, there’s no certainty its spending power will be retained over the long term as price rises eat away at its value in real terms.

There’s also an issue in deciding what to do with uninvested cash once the Bank of England begins to cut base rates again, which will inevitably drag down cash returns. If you consciously decide to withdraw funds from the investment market, instead locking them away in a fixed-term cash savings account with plans to reinvest them back into the financial markets at a later date, you’ll be betraying the adage “it’s not timing the market, it’s time in the market.”

The volatility in global markets over the past 18 months has, understandably, made investors feel jittery. For example, if we look back over the past 20 years, we’ve seen a range of volatility-inducing events. The global financial crisis, Brexit and the Covid pandemic, to name a few, have all caused investors sleepless nights. Yet the MSCI World Index has still gained 531% during the period, far outpacing cash on deposit, which would have compounded a mere 41%. This highlights how important having a long term, uninterrupted investment plan can be.

However you choose to put your hard-earned cash to work, it’s important you understand the different risks attached to both savings accounts and investing. Cash can have a place in everyone’s financial plan, but it should form part of that plan, not govern it. Cash is far from a risk-free asset, despite savings rates inching up recently. Even the most competitive rates can still lock in losses when compared to inflation. Whilst investing can be volatile over the shorter term, for those with a long-term financial plan, historical data shows us that this is the only effective way to keep our money safe from the ruinous effects of inflation.

Market volatility graph

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used, you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding as at 23 August 2023.