Cash has a wide range of uses for clients, in addition to placing it in a savings account for a rainy day.
“It plays an important role in any portfolio, both as a low-risk asset providing balance and peace of mind when equity markets are volatile, or as clients move towards retirement and increasingly want to derisk their portfolio,” says Simon Merchant, co-founder and chief executive of Flagstone.
Jonathan Cooper, head of paraplanning at Drewberry, also highlights its versatility: “Within any investment vehicle, at portfolio level, an element of liquidity is required as it applies the ‘grease’ to allow the efficient repositioning of a portfolio and its asset allocation, as well as to provide a pool of resource to exploit perceived investment opportunities.
“Cash as an asset class in its own right is also important due to its negative correlation with other asset classes and its ability to derisk and provide stability.”
It is also needed to pay for the costs associated with investment, Cooper adds: “An element of cash is often a necessity, particularly with modern pension and platform accounts, which require a cash balance to cover the day-to-day running costs."
Ross Leckridge, associate director at Johnston Carmichael Wealth, emphasises the importance of cash too: “Cash can always be useful as part of a risk-management strategy and there should always be a sensible level of cash holdings retained for clients.
“In our advice process, we often use cash flow planning, which helps to show how clients’ overall assets might fall in times of a market crash.
"This is a useful tool in assessing a client’s capacity for loss and subsequently how much cash should be held on deposit to derisk the portfolio."
Leckridge adds: “When we have clients in drawdown in their pension, cash plays a key role. In order to ensure that their short-term income needs are affected as little as possible by a market fall, we hold two years’ worth of income in cash and a further two years’ worth in a lower risk investment.
“This means that clients can continue to take monthly withdrawals to provide the income they need without having to sell any shares or units in the underlying investments for up to two years.
"When markets recover, an ad-hoc disinvestment can be carried out to replenish the cash reserves.”
Fiona Tait, technical director at Intelligent Pensions, also stresses the importance of cash when it comes to pensions: “With interest rates so low, we have to consider the fact that holding cash creates a significant drag on investment performance.
"However, it does also provide a certainty that no other asset class can deliver. We therefore use cash as insurance rather than an investment, providing protection against short-term loss in periods of market volatility.
“This is obviously useful where a client is taking income from their pension plan and needs to know that the money will be available to cover their expenses.
