When Cash Isn’t King

Written by George Fisk, CFP™

Inflation is the talk of the town, and with headlines such as ‘US consumer prices rise at the fastest pace since 2008’, one can see why. Consumer Price Inflation in the US stood at 4.2% in the 12 months to April this year, surprising economists across the globe.

Financial stimulus on both sides of the Atlantic, along with people spending more as restrictions are lifted and international distribution delays, not just down to Covid restrictions but also because of a 400m long, 200,000 tonne container ship blocking the Suez Canal, all have their part to play in the uptick in inflation.

Should we worry?

The Council of Economic Advisers does not seem particularly concerned with the latest inflation data, describing it as “normalisation” of prices as the US economy licks its wounds from the pandemic fallout. Others agree, citing that the substantial increase in demand as vaccinations roll out (and people feel safe to go back to work) outweighs Covid stricken supply, producing a short term rise in prices as demand outweighs supply – a classic example of demand-pull inflation. That said, it is expected that supply chains will re-establish themselves as the global response to Covid takes hold, which should, in theory, restore the previous demand/supply balance.

Inflation risk

Nobody knows exactly what the next few years will bring in terms of rising prices. In this current low interest rate environment, keeping funds in cash will carry some inflation risk. This is because the value of this cash could lose future purchasing power in real terms, as the interest rate of return for bank deposit cash is lower than the rise of prices for consumer goods, described as a negative real return in economics.

In our opinion, whilst it makes perfect sense to maintain an emergency cash pot of 6-12 months expenditure, savings over and above this amount that are not earmarked for short term expenditure are generally best invested.

Investor Portfolios

During our consultative process, we assess your emotional risk tolerance, goals and objectives, time horizon and capacity for loss for your invested funds. From these four metrics, we arrive at a portfolio allocation that is suitable for you. In the wise words of David Butler, Co-CEO of Dimensional Fund Advisors, ‘we aim to control what we can control’ – tax efficiency, asset allocation, fees and trading costs. Not only do we create an investment strategy and structure for you but, by looking at your wealth holistically, we can also provide an opinion on how these recommendations compliment any assets you hold outside of our managed portfolios, including emergency cash reserves which can be subject to negative real return.

The strategic asset allocation will be designed to meet your short, medium and/or long-term goals leaving the newspapers to worry about fearmongering headlines whilst you relax with a cup of tea.

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Use of information: 
•    Nothing in this document constitutes investment, tax or any other type of advice and should not be construed as such. 
•    The investments and strategy noted in this document may not be suitable for all investors and making available the information in this document is not a representation by MASECO that any investment strategy is suitable for any particular client. 
•    This document is provided for information purposes only and is not intended to be relied upon as a forecast, research or investment advice. 

Risk Warnings: 
•    All investments involve risk and may lose value.  The value of your investment can go down depending upon market conditions and you may not get back the original amount invested. 
•    Your capital is always at risk. 
•    Although the information is based on data which MASECO considers reliable, MASECO gives no assurance or guarantee that the information is accurate, current or complete and it should not be relied upon as such. 

Performance: 
•    Past performance is not a reliable indicator of future results. 

MASECO LLP (trading as MASECO Private Wealth and MASECO Institutional) is a limited liability partnership registered in England and Wales (Companies House No. OC337650) and has its registered office at Burleigh House, 357 Strand, London WC2R 0HS. The partners are Mr J E Matthews and Mr J R D Sellon; Mr D R B Dorman, Mr H Q A Findlater, Mr T Flonaes, Mr N B Tissot, Ms A L Solana. Telephone calls may be recorded for your protection.

MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is registered with the US Securities and Exchange Commission as a Registered Investment Advisor.