Thursday, 11 July 2013

Taking small steps out of cash

Generating the returns required for a longer retirement needn't mean a wholesale change of strategy, says Alex Hoctor-Duncan.

There are three reasons why investors stay in cash: 
1.  they like the income, 
2.  they like the idea of their money being protected and 
3.  they worry about volatility. 
Investors also like the capital preservation that cash offers.
But there is inherent risk. Returns are low, so investors run the risk of seeing their purchasing power ravaged by inflation over the long term.
I sense that people are starting to recognise the limitations of cash. They feel they should look to make their money work harder, particularly as they are likely to be living longer.
However, what they want to achieve with their savings – a secure retirement with a good income – and what they are doing to achieve it, are not properly aligned. Simply saving in cash is not necessarily going to generate the returns required for a longer retirement.
This needn’t mean a wholesale change of strategy; it could be more about taking small steps out of cash, about consulting an IFA and revisiting their financial goals. It could mean looking again at how and where they invest – in the UK or internationally – and working with the adviser to set new objectives and plot the path towards those goals.
If taking small steps is the path an investor chooses, the smart option is not to take all the money out of traditional cash or bond investments. Taking a portion of that money and looking for investments which provide an element of more flexible income could be one step that less risk-averse investors could take towards achieving their goals.
The earlier they take action the better, but it is never too late. However, wait 10 years and contribution levels might need to be double what they would have been.
Moving out of cash and safe haven investments in search of higher returns will involve accepting a greater risk of capital loss. You may get back less than you originally invested. Past performance is not necessarily a guide to future performance.

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