The Dilemma: Clients, Cash and Timing the Market

The Dilemma: Clients, Cash and Timing the Markets | IBOSS Insight September 2023

At the time of writing, many easy-access savings accounts are paying circa 5% in the UK and the number of advisers reporting to us that their clients are querying the merits of investing in multi-asset funds, predominantly equities and bonds, over cash is increasing daily.

This unfavourable backdrop for investing in risk assets means clients have been holding off new investments, topping up investments or withdrawing multi-asset funds and holding up in cash.

We believe we must do more to outline how long-term investing in risk assets has historically beaten inflation and delivered better returns for investors. Cash savings accounts offer a level of security and are low risk, but typically they provide lower returns than riskier investment options like equities or bonds, and the interest rates may struggle to keep pace with inflation, potentially eroding the purchasing power of savings over time.

Years of Quietly Paying Virtually Nothing

In the aftermath of the 2008 financial crisis, global stocks embarked on an extended bullish run, delivering positive returns for eleven out of the fourteen years. These returns were substantial enough to entice many investors into the equity market. Concurrently, the meagre interest rates available for savings accounts during much of the period made stocks appear even more appealing.

*Bank Of England Base Rate (data to 31/08/2023)                                   Source | FE Analytics and Bank of England

Please note the colors demonstrate quartile positions within the table above.

However, since December 2021, stock markets have taken a downturn, prompting a revaluation of the attractiveness of investing in equities instead of holding cash. This shift in perspective comes about due to the Fed, the BoE, and other global central banks being forced to increase interest rates to combat inflation, which turned out not to be transitory.

Banks and building societies are now loudly championing their saving rates after years of quietly paying virtually nothing, regardless of the tie-in period.

Investing In the Now

Human beings display any number of biases, and investors are merely a subset that also succumb to biases, some of which may be detrimental to their investing goals.

Recency bias in investing is often expressed as thinking that whatever the current and recent market conditions are will prevail. As an example, when equity markets rise, fresh money is drawn in, in the belief they will continue to do so. Furthermore, it will likely be added to sectors or geographies that have performed the best. We need to look no further than US growth stocks to see this evidenced, as fear of missing out (FOMO) is a complex emotion to fight against.

When markets fall, it is difficult for investors to put money into equities, yet the more significant the fall, the better the relative entry price point. Both bonds and equities dropped sharply in 2022 and in 2023, so far, we have seen only small gains in equities and further losses in bonds.

So, armed with recency bias, clients intuitively believe cash looks like the best place to invest right now.

Cash is Always the Answer

We have always believed that cash is an asset class in its own right and should always play a part in holistic financial planning and, for most investors, be part of their multi-asset portfolio investment. That said, careful consideration must be given to both time frames and the relative attractiveness of cash versus other asset classes.

In 2021, money flowed into both cash and equities, even as valuations got more expensive by the week. Since then, valuations have fallen in many world areas, but equity flows have reversed. Although cash rates have markedly improved over that period, unless your investing philosophy is only, and forever, to hold cash, why is this not a good opportunity to buy the non-expensive parts of the equity market?

In March 2020, the yield on the 10-year Treasury dropped to around 0.6%, making the bonds more expensive than they had ever been, yet there were plenty of buyers. One of the main reasons there were buyers is because the central banks had convinced most people that inflation would never be an issue and interest rates would stay low for a very long time. That assumption was spectacularly wrong on both counts, and today, the US 10-year Treasury yields circa 4.5%. Again, this is the much better entry point, but once again, investors are reluctant to invest when cash itself pays you 5%.

So, a US 10-year Treasury will pay the 4.5% for 10 years, but what will cash rates be over the next 10 years?

While anybody can have an opinion and some super whizzy economic models can attempt to predict, the answer is absolutely certain; nobody knows what it will be.

In a Fix

One option is to lock in cash rates by investing in a fixed-term account, which may be suitable for a percentage of any investor’s overall portfolio.

Let’s assume somebody fixes for two years at 5%. There is a risk interest rates will have accelerated well beyond the 5%, and just like somebody investing at 1.5% eighteen months ago, the investor would probably not be feeling as happy as they were at the time; this is a potential opportunity cost.

Alternatively, let’s assume rates have dropped back to 2.5% by the time the bond matures, and equity and bonds markets have risen. If this is the case, then because the markets are rising, reinvesting will almost certainly feel more comfortable, yet the entry point might be another 2021 high point.

The fact is, having a variable rate means the excellent rates might be short-lived, but tying your money up brings an opportunity cost; that’s the whole point of fixed rates.

OK, that’s the Dilemma, But What’s the Answer?

We are dyed-in-the-wool multi-asset managers, and it won’t come as much of a shock, but the answer is multi-asset investment. Combining assets that are attractively priced in both relative and absolute terms based on an investor tolerance for risk (as measured by volatility), drawdowns and timeframe(s).

Over time, a manager should be buying and selling assets to reflect the latest economic realities and the price points of the underlying assets. There is an additional risk if the manager becomes anchored in certain geographies or sectors and continues to hold assets which are expensive or too narrow in scope. As we saw with some managers keeping their fixed income allocation statically into 2021/22, investors take on considerable risk if the manager’s investment thesis is predicated on a ‘this has been working for years’ type approach.

In summary, we think many investors understand that they should buy low, sell high and be well-diversified, but then some succumb to the temptation of recency bias and just gravitate to what’s working right now. There is a reason why a saying like “don’t have all your eggs in one basket” is so well-known, and it’s because it is just common sense. Investing is no different to many other aspects of life and having several baskets, no matter how apparently compelling the narrative to put all your assets in just one, is very unlikely to be the right answer.


This communication is designed for professional financial advisers only and is not approved for direct marketing with individual clients. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Investments are intended to be held over a medium to long term timescale, taking into account the minimum period of time designated by the risk rating of the particular fund or portfolio, although this does not provide any guarantee that your objectives will be met. Please note that the content is based on the author’s opinion and is not intended as investment advice. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the OEIC fund or discretionary fund management model portfolio is suitable and appropriate for their customer.

Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.

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