Winter in the fictional world of "Game of Thrones"
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How worried are you about your investments? Recent stock market wobbles prompted an alarmist post from a Facebook friend, but you may have heard similar fears expressed at a dinner party, in the pub or even from a cab driver.

“Interesting lunch with a senior lawyer friend who works in the banking sector,” my friend posted. “Strongly recommends moving most of your pension from equities to a mixture of cash and government bonds NOW. Predicts carnage in the next six months.”

I did not hit the “like” button. Cash may be regarded as the ultimate safe haven for investors, but it can be a terrible long-term investment. With interest rates struggling to keep pace with inflation, UK savers have got used to seeing their money go backwards.

An old investment adage suggests that when someone you wouldn’t expect tells you to buy something — in this case, cash — it’s time to sell.

On the other hand, Berkshire Hathaway, the investment holding company run by investment guru Warren Buffett, has revealed it is running record levels of cash. The renowned investor recently told shareholders he was struggling to find “good acquisitions at sensible prices”.

It is worth noting that Berkshire Hathaway previously amassed a large cash pile in 1999 before the dotcom bubble burst, and between 2005 and 2007 ahead of the financial crisis.

Meanwhile, John Pattullo the manager of the Henderson Diversified Income fund went so far as to quote the famous “Winter is coming” line from Game of Thrones in his latest blog. He’s convinced that the upward phase of this economic cycle is coming to a close.

Investors will be attempting to understand if last week’s downturn was a temporary pullback or the start of a more pronounced correction. Whatever you think, it’s unwise blindly to follow either friendly investment advice or investors with fabulous reputations. But it’s good to understand the rational investment reasons for holding cash.

The key challenge is to fine-tune how much cash you need, either for rainy day spending or as a buffer when drawing income. Then you can create some personalised rules about cash levels in your investment portfolio. There’s an important distinction between these two types of cash holdings — the buffer and the investment — and it’s worth reviewing both as the years go by.

Here are my three top reasons for holding cash.

  • First, if you can’t find quality investments at sensible prices. No investor wants to buy when investments look expensive. After a 10-year run of markets climbing after the financial crisis, many investors are not selling but they’re also thinking “I’m not going to buy at this level”.
  • Second, as an opportunity fund. If you don’t have a cash war chest, you won’t be able to fill your boots with bargains when the market falls.
  • Third, as a haven when you’re feeling nervous. While you can’t lose money overnight in cash, stocks and shares always have a downside risk.

For UK investors, the fear and indecision around Brexit is boosting the allure of cash. Yet the Financial Conduct Authority has raised concerns about cash as part of its Retirement Outcomes Review. It says that pension investors at the stage of drawing income are unwittingly holding “inappropriately high” cash balances, which could cause them to lose out on future retirement income.

I can see that customers of Interactive Investor have relatively high cash balances. In self-invested personal pensions (Sipps) cash balances have nudged up to an average 18 per cent, but this may only be part of the investment picture.

Pensions are thought of as the cautious part of your assets, where you develop a sensible fund investment strategy, and maybe hold more cash. But if you have high levels of cash elsewhere, you may be in a “safe” position already.

Lots of investors trickle money into Isas and Sipps without an overall investment strategy. Instead, we compartmentalise our different “pots”. You may have your savings in the bank, your ‘cautious’ retirement fund, your stocks and shares Isa that you invest more aggressively, and even some play money on the side that you use for trading.


Make sure that this is joined up as one strategy by identifying how much cash you’re holding as a percentage of your total assets.

Drilling down into your investment portfolio becomes important because if you’re holding funds, you might have more “invested cash” than you think. Often this is in the form of the fund manager holding money market funds (widely regarded as being as safe as bank deposits).

For example, property funds now hold more cash than before the referendum to meet potential investor outflows. The popular M&G Property Portfolio has about 16 per cent cash.

The same is true of many UK equity funds. Those running high levels of cash include the F&C Mid Cap (8 per cent), JOHCM UK Opportunities (30 per cent) and the CFP SDL UK Buffettology fund (16 per cent) — no surprises there, given the fund is run according to the investment philosophy of Mr Buffett.

If you are already comfortable with the level of cash you hold, does it make sense to be paying fees to a fund manager to hold more? Popular global funds such as Fundsmith Equity and Lindsell Train Global Equity have comparatively low levels of cash, at 2 and 3 per cent respectively.

But when asking how much cash to hold, there’s no right or wrong answer. Younger investors who are still earning an income should aim to hold three to six months’ living expenses (including mortgage or rent), plus extra cash to cover unexpected expenditure — a new boiler, household repair or expensive dental bill.

Once you’re retired and drawing an income from investments, having two years’ worth of living expenses in cash is probably enough to allow you to weather short-term bumps in the stock market.

But retirement portfolios often have regular cash flow in the form of dividends. And if this “natural yield” is enough to pay your living expenses, you may just need a year’s supply in cash in the bank. Calculate what works for you.

Finally, how to create your investment rules. First find a benchmark that works for your risk profile. The FTSE UK Private Investor series of seven indices for different risk levels is useful here. In the middle of these, the Balanced Index has 8.4 per cent in cash.

Work out under what circumstances you will buy and sell holdings. This could be rebalancing, selling some of your winners to buy more investments that have underperformed, every six months, or after a 30 per cent gain.

Then decide the upper and lower levels of cash that you’re prepared to hold as an “opportunity fund”. If your cash level starts creeping up, find something to invest in. Often UK investors need to expand their horizons internationally.

Fears of Brexit disruption and high US equity valuations are prompting investors to go further afield. From our customer data, we can see than UK investors have been adding exposure to China and Japan, often via investment trusts that focus on these areas.

Once you’re sure that your portfolio is fully diversified, it’s easier to view your cash holdings as a true investment.

Moira O’Neill is the head of personal finance at Interactive Investor. The views expressed are personal. Twitter: @moiraoneill

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