Why Cash Has Been Getting so Much Love Recently?Author: Kathryn Gaw
Cash has always been seen as a non-investment – a back-up plan in case more lucrative investments go south. Over the past decade, quantitative easing, low interest rates and rising rates of inflation have meant that most cash investments were worth less than nothing.
But recently, there has been a surge of interest in cash options again. This may be a reaction to global instability, particularly in one-time ‘safe havens’ such as bonds.
Earlier this year, the Japanese government announced negative returns on their bonds for the first time ever, and it was recently confirmed that more than 70 per cent of all Japanese bonds will remain in negative yields throughout 2016. This essentially means that investors will have to pay for the privilege of keeping their money in treasury bonds, which have historically been the first choice of the risk-averse investor.
Furthermore, recent incentives such as the rising ISA allowance and upcoming Lifetime ISA have made cash investments more attractive than ever before.
Here are just a few of the investment options which are fueling the cash resurgence…
Cash investment options
Keep your cash in a bank
In the UK, the Financial Services Compensation Scheme (FSCS) guarantees all bank deposits up to a maximum of $110,000. This acts as a free insurance policy for savings and cash holdings in the unlikely (but possible) event that your bank goes out of business. While the interest rates remain low in most UK banks, at least bank customers know that their money is safe no matter what happens.
Use a Cash ISA
In the current tax year (April 2016 – April 2017), each individual can save up to $22,376 in a Cash ISA, completely tax free, and in this year’s Budget, Chancellor George Osborne vowed to raise this limit to $30,000 next year.
While many Cash ISAs still offer relatively low interest rates, they can be offset by the enormous tax-free savings which are available. Compound interest means that the more you save, the more your savings are worth, so by investing cash in an ISA wrapper, you could build up a significant nest egg with zero risk.
Combine cash with forex trading
Cash investments don’t necessarily have to take place within the confines of your own currency – you can invest in cash from anywhere in the world through foreign exchange (or ‘forex’) trading. You can blur the lines between ‘cash’ and ‘forex’ by buying up foreign currency in bulk while their value is low, then exchanging it back when the value rises again.
This requires a little bit of market knowledge and an awareness of global events, and it is a fairly risky version of cash investing! However, if you find a favorable exchange rate (and low commission charges), and you can hold your nerve, it can be a fun introduction to the world of forex trading.
Invest in Cash Funds
Cash Funds are financial instruments run by fund managers, which only invest in the money markets (i.e. certificates of deposits, bonds, call accounts, and deposits). The idea is that the manager actively seeks out the best cash options on the market so that you have access to the most generous interest rates.
Again, you can invest up to £15,240 in a Stocks and Shares ISA completely tax free, so if you are unable to secure a decent interest rate on your Cash ISA, investing in Cash Funds through a Stocks and Shares ISA is a viable alternative.
However, these funds are slow-burners, and unlikely to produce life-changing returns over time. BlackRock’s Cash A Acc Fund has returned just 0.4 per cent over the past five years, and Henderson’s comparatively successful Inst Cash Fund has returned just 1.7 per cent over the same period of time. When you add up the fund fees and commission rates, you would be lucky to make a small profit after 5-10 years, and as with any fund, the value can fall as well as rise.
Stash it under your mattress
OK, so it may not be a good idea to literally store your cash under your mattress, but some people do like the idea of keeping their money close by and readily available in times of trouble.
It goes without saying that physical cash savings are extremely unlikely to increase in value, and the rules of inflation actually suggest that your spending power will decrease significantly over time. However, this option probably offers more liquidity than any other cash investment option on the market, and this benefit may outweigh the risks in some cases.