FAQ Regarding Retirement, Pensions
What are the advantages & disadvantages of having cash in your portfolio?
At Reeves Independent, cash is an integral part of our investment portfolio. The simplicity and familiarity of cash is one of its biggest advantages, but excessive devotion to it can be the undoing of a successful portfolio.
It has a very important role in a portfolio, being the main asset class for managing investment risk, and is considered to be the least risky asset. The most common types of cash investments are bank and building society saving accounts and money market funds (which is a mutual fund that invests solely in cash and short-term cash equivalent securities).
- As mentioned, the main advantage of cash as an asset is that it is very safe. It's the only class that doesn't pose capital risk, as you always get back what you put in.
- During times of market uncertainty, cash can reduce the volatility (i.e the ups and downs) of the overall portfolio. While the price of other assets may be falling, cash will hold its value better.
- Cash is also backed by the government: they will protect you up to £85,000 per bank account through the Financial Services Compensation Scheme (FSCS) should a bank or building society go bust.
- Another benefit of having cash as an asset in your portfolio is, they are typically liquid and can be accessed quickly and easily at any time. This is essential if you plan to withdraw a regular income from your portfolio.
- At Reeves Independent, we take the view that in these volatile times, holding cash allows us to react swiftly to any buying opportunities, without having to take the time to sell other assets first. This can be vital in ceasing an opportunity.
- The disadvantage of holding cash is, when markets are rising you are missing out on potential growth.
- Current interest rates are almost non- existent and are not keeping up with the current rate of inflation, the real value of your cash is being slowly eroded. If you're looking to grow your savings quickly and you have too much invested in cash assets, your wealth won't be going anywhere fast
To summarise, at Reeves Independent, in our tactical model investment portfolios we are currently overweight on cash as an asset class. This means we have higher cash levels than in 'normal' market circumstances. Recently, information from an industry recognised survey suggests, investors have the highest levels of cash in their portfolio since the financial crisis. We are worried about the short-term risk in the global stock markets due to what we believe to be increased levels of uncertainty. It is important to note that high levels of cash should only ever be a short-term position and is only a temporary strategic allocation here at Reeves Independent.
What are the advantages & disadvantages of having bonds in your portfolio?
Bonds are corporate and government loans with you playing the part of the lender in exchange for interest payments over a set period.
Through issuing a bond, a company or government can borrow money in exchange for paying a fixed interest over a set period of time, along with paying the initial amount back at the end. When you invest in bonds, you are the lender and benefit from regular payments over the life of the bond.
A bond fund is likely to pay higher returns than cash and money market investments, but they aren’t completely safe from risk. The return you get on a bond fund can vary dramatically depending on the underlying bonds. For instance, it could be made up of high- yield, risky, junk bonds, or it could own low-yield, safe, government securities only.
- Bonds provide income- While many investments provide some form of income, bonds tend to offer one of the highest and most reliable cash streams. Even at times when prevailing rates are low, there are till plenty of options (such as high-yield bonds) that you can use to construct part of your portfolio that will meet your income needs.
- Bonds offer diversification- Almost every investor has heard the phrase 'don't put your eggs in one basket'. It may be cliche, but it's time-tested wisdom, nonetheless. Over time, greater diversification can provide investors with better returns than portfolios with a narrower focus.
- Reduce volatility- Bonds can help reduce volatility, they can be impacted by market events in a different way to other investments. So, if other assets take a hit, it may be the case that the bonds you hold are experiencing stronger returns. This makes them an excellent candidate if you're looking to build up a portfolio of diverse asset classes that has a good balance to it.
- Though bonds are fairly low-risk, they still aren't a sure bet. Even though they will provide regular interest they are still exposed to market risk. This means the value of your capital could decrease.
- Plus, bonds are also subject to interest rate risk. When interest rates go up, they remain static, so they become less valuable. However, the opposite is also true, and they can hold more value if interest rates decrease while you're holding them.
To summarise, at Reeves Independent, we are currently underweight on the asset class bonds in our tactical investment portfolios. This is because we believe there is still a strong possibility of market downturn over the short- term. We believe that the capital value of bonds may fall if this is the case.
With that being said, we still do hold several bond funds as a hedge in case our outlook is incorrect. Nothing is ever certain with the world of investment, no-body knows what is around the corner.
Do you have a question? Email us at email@example.com.
It is important that no actions should be taken without first taking advice. Personal circumstances and an individual’s appetite for risk means that the advice for one person may not be the same for everyone. Reeves do not advise on Defined Benefit pension schemes. Reeves do introduce a third party specialists in areas of work we do not cover. Reeves run an advanced investment portfolio management service on an advisory basis only