When stock markets are volatile, it's natural to feel a tug-of-war between the urge to move investments to cash or stay invested and ride out the storm.

Cash offers a tangible sense of security. It’s something we can physically touch, see, and use immediately. That’s hard to ignore, especially when markets become more unpredictable. But while some have been tempted to sell their holdings and convert to cash, is that the wisest move?

Turbulent times

There’s no denying it – more of us have felt the financial squeeze in recent times. The escalating cost of living has emphasised the importance of having access to cash – either as a buffer for us, or an emergency fund for loved ones.

While keeping some cash to hand makes good sense, holding too much for too long might not be as safe as it seems. It could leave you more vulnerable to inflation, which gradually erodes the purchasing power of your hard-earned money.

Getting the balance between cash and investments right requires a careful approach and long-term view – which is why many people choose to work with a financial planner. They can help you understand your goals, how your money will help you achieve them, and guide you towards investment decisions that align with your long-term wellbeing.

Getting the balance between cash and investments right requires a careful approach and long-term view.

The benefits of cash

Holding onto cash has advantages that can be particularly appealing in uncertain economic times. We take a look at why keeping some money in cash can be a smart part of your financial strategy.

– Predictable returns
With recent hikes in interest rates, many savers have chosen to park money in a savings account. Banks and building societies are offering some of the most attractive returns we’ve seen in nearly two decades, prompting many investors to reassess the appeal of cash as a component of their investment portfolio.

– A safe haven
In the throes of a market downturn, the value of cash increases —not in terms of what it can buy, but in its ability to prevent further financial loss. While stock market fluctuations are unpredictable, cash remains unaffected by the highs and lows. This stability can be a comfort, offering peace of mind, knowing that your wealth won’t be at risk of dropping overnight due to market volatility.

– A financial buffer
As well as offering peace of mind, every financial planner will tell you to keep an emergency fund. This readily accessible reserve is your financial lifeline for unexpected expenses – whatever they might be. Financial experts often recommend keeping an emergency fund equivalent to three to six months’ worth of living expenses, so you’re protected against any nasty surprises without having to resort to debt.

– Ultimate flexibility
Cash is king when it comes to flexibility. It ensures your money is there exactly when you need it, without the risk of loss that comes with investing.

Cash holds an important role in a well-rounded financial plan. As well as giving you liquidity, it offers psychological comfort, a buffer against market volatility, and a safeguard against unexpected expenses. Understanding how much to hold in cash can be just as important as knowing when to invest.

Financial Freedom

The benefits of investing

While the safety of cash can be appealing, especially in volatile times, staying invested has its own set of compelling advantages that can help protect and grow your wealth over the long term. However, it’s important to remember that with investing, your capital is at risk, and you may not get back the full amount you invest.

1. Protection from high inflation
The biggest risk of holding too much cash is the effect of inflation. Over time, inflation erodes the real value of your money and reduces its spending power. While it’s true that inflation also affects the stock market, investing provides an opportunity to generate above-inflation returns.

2. Opportunity for growth
With investing comes risk, but it also offers the opportunity for substantial growth over time. Historically, investing in equities – stocks and shares – has provided returns that outstrip inflation and savings account interest rates over the long term. That doesn’t mean they always will, but by staying invested for the long-term, you’re giving your money the best chance to grow.

3. Generate long-term income
As you get older, a bespoke investment approach becomes crucial to ensuring a consistent income to see you through your retirement. This involves long-term investments designed to safeguard your savings against inflation’s erosive impact, extending the purchasing power of your funds further than might otherwise be possible.

Investing is not just about surviving market downturns, it's about having a long-term view.

Avoid the common mistake many investors make

Market fluctuations are a fact of life and it might be tempting to try and time your entry and exit to maximise returns. In reality, timing the market perfectly is almost impossible. When markets dip, it’s natural to feel a bit panicky, but it’s crucial to remember that these are only paper losses until you decide to sell.

Choosing to stay invested through the downturns is a fundamental principle of long-term investing. It’s not about weathering the storm, it’s about making sure you’re still around for the eventual recovery. For instance, investors who pulled out of the stock market in mid-2023 missed the subsequent rally that saw many major indices notch impressive double-digit gains by the end of the year. This rebound not only recouped earlier losses for those who remained invested but could also have led to significant profits.

By staying the course, you allow your money the opportunity to recover and potentially grow beyond its original value. Conversely, cashing out when the markets are low eliminates any chance of benefiting from a market upswing.

In essence, investing is not just about surviving market downturns, it’s about having a long-term view. With a disciplined approach, you can ride out times of market volatility and benefit from its potential for significant growth over time.

It’s important to note that while investing presents opportunities for growth, it does come with risk. Markets can be unpredictable and it’s important to be prepared for the downs as well as the ups. Your investments can decrease as well as increase in value, and there’s always the possibility of losing money. This reality underscores the importance of a carefully-managed approach to financial planning.

Amber River financial planning

An Amber River financial planner can help guide you through these complexities. They’ll provide tailored guidance that reflects your long-term goals and objectives, showing how your savings and investment strategy will help you achieve them. They can offer insights and strategies to balance the benefits of holding cash with the growth potential of investing, ensuring your financial plan remains robust in the face of inflation, market volatility, and personal life changes.

Get in touch

Amber River has a network of Chartered financial planners right across the UK, ready to offer truly independent advice. If you want to set up an initial appointment, call 0800 915 0000, or alternatively use our contact form here.