The risks of hoarding cash

Continued global uncertainty has led to an increasing number of investors holding on to their money. Whilst allocating some of your portfolio to cash can be a sensible option, taking it too far can mean you’re actually at risk of losing out financially. So how can you balance risk and reward and create an investment strategy you’re comfortable with?

The risks of hoarding cash

When global volatility, characterised by US-China trade tensions and Brexit, combined with political changes to create an uncertain macroenvironment, the second half of 2019 saw investors moving more money to cash. The trend has accelerated and looks set to continue as the global pandemic weighs on confidence. The recent CNBC Millionaires Survey showed that, in addition to their usual holdings, millionaires are planning to allocate 19 per cent of their assets to cash or its equivalent over the next 12 months.1

"Hoarding cash is a natural reaction," says Jonathan Sparks, Chief Market Strategist, HSBC Private Banking. "Certainly, when we're coming to the end of an economic cycle or when there's uncertainty, it can make sense to hold some – perhaps even a little over and above what you would normally. However, the signs are that investors are holding more than a little and, as time passes, that could mean they're missing out on opportunities."

The reality of low or negative rates

With interest rates at historic lows and likely to remain so for some time, hoarding cash could be costly in real terms and waiting for rates to move higher before investing may be in vain. "Government action supported by central banks to mitigate the impact of widespread shutdowns has led to record levels of debt," says Jonathan. "If you set that alongside a desire to shore up consumer and business confidence and reinvigorate spending levels, any swift rise in rates is unlikely. In fact, the markets are pricing in a greater chance of rate cuts than hikes in developed markets."

Investors also need to consider what that implies about the likelihood of a rapid bounce back. Economic commentators are generally in agreement that economic activity is likely to remain below pre-crisis levels until well into next year. A prolonged spell of bumping along the bottom could also raise the spectre of negative rates, as Jonathan explains: "We've seen models of rates falling into negative territory emerging in the US, where inflation and exceptionally high levels of unemployment are key factors. Meanwhile, in the UK, the Governor of the Bank of England hasn't ruled out the possibility of negative rates.

Consider the impact of inflation

Keeping an eye on how inflation is faring is also wise. Lack of demand and falling energy prices have weighed on already low levels of inflation in many economies. Central banks and governments will be watching carefully to try to avoid a deflationary spiral – hoping that their fiscal efforts to mitigate the impact of COVID-19 are enough. They are also ready to try to prevent inflation from turning negative, creating a situation where investors' purchasing power could be eroded.

"With rates so low, the difference between earning no returns and achieving 1.5 per cent or 2 per cent can seem paltry," says Jonathan. "However, having enough to beat or at least keep pace with inflation is really important." Even cash on deposit isn't without risk, from low interest rates and inflation, as well as missed opportunity.

The good news

On the positive side, if you've been hoarding cash, you're now in a good, liquid position to invest in opportunities. That means that now is a good time to adapt – and taking a strategic view of your investment planning is a good start.

"Investors operating in a low-yield environment stand to gain by being more creative," says Jonathan. "Government bonds or highly-rated investment grade investments may not, on their own, provide suitable yields. Instead, investors could look to combine low-risk assets with some degree of risk that would potentially enhance returns."

There is a broad spectrum of options for investors who have perhaps kept their powder dry. For example, consider high-quality bonds alongside protected equity risk. The key is to explore these options to ensure that your current and future investment strategies don't risk you losing out. "Understanding both the upside and downside of cash versus investments and considering that through the lens of your own risk comfort levels can help you create a balanced portfolio that's unique to your needs and to chart a course that combines opportunity, potential and security," says Jonathan.

If you would like to discuss your investment options to understand potential opportunities to safeguard and grow your wealth in the current climate, contact your Relationship Manager or Investment Counsellor.



1 CNBC, Millionaires bet that stocks will take at least another year to recover, May 2020
Back to top Back to top

Important information

This material is issued by HSBC UK Bank plc which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the UK. It has been issued for your information purposes only.

Please note that HSBC does not provide tax or legal advice and clients should seek professional advice from their tax advisor. Any reference to tax is based on our knowledge of the current and proposed tax regime and is subject to change.

In the United Kingdom, this document has been approved for distribution by HSBC UK Bank plc whose Private Banking office is located at 8 Cork Street, London, W1S 3LJ.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of HSBC UK Bank plc. Copyright© HSBC UK Bank plc 2019.

ALL RIGHTS RESERVED