Why cash is still king: investors take advantage of high interest rates and maximise flexibility

Investors are boosting their cash holdings to capitalise on peak interest rates, with many adding to their cash ISAs and savings accounts.

A survey by the trading and investment platform eToro reveals that cash is seen as the most attractive asset class, ahead of equities, bonds and crypto.

The Bank of England base rate is currently 5.25%, marking a 15-year high. But with rates forecast to drop this year, the opportunity to take advantage of such generous returns on cash is likely to be short-lived.

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“Retail investors in the UK have understandably looked to capitalise on high interest rates as cash handily beat the FTSE 100 last year,” comments eToro global markets strategist Ben Laidler.

“The cash-focused approach has also enabled some to stay flexible amid higher mortgage repayments and cost-of-living constraints.

“However, the New Year typically prompts investors to reassess their portfolios, and with rates widely expected to dwindle over the coming months, we expect to see a steady return to ‘risk on’ sentiment through 2024.”

Figures from Hargreaves Lansdown show that some investors are already starting to leave cash behind, moving out of money market funds and opting for corporate bond funds and equity funds. The wealth manager said investor confidence in equities was growing, although money market funds were still popular among lifetime ISA customers.

Why do investors like cash? 

The eToro survey found that 22% of investors see cash assets, such as savings accounts and cash ISAs, as the most attractive asset class, ahead of equities (18%), bonds (12%) and crypto (11%). This comes after 34% of investors already increased their cash allocations in the second half of 2023.

Of those allocating more money to cash, almost half (44%) are primarily doing so to earn a solid return through higher interest rates, while more than a third (37%) indicated they were building “dry powder” with a view to reinvesting when risk assets look more attractive. Indeed, despite strong global stock market performance last year, fewer than one in four (22%) investors believe we are currently in a bull market; instead, the majority (52%) expect a bull market to begin at some point in 2024 or beyond. 

The survey also revealed significant generational differences. More than two-thirds (67%) of UK investors aged 18-34 increased their allocations to cash in the second half of 2023; for investors aged 55 and above, the figure was just 27%. This is also reflected in respondents’ levels of experience: the majority (51%) of investors with fewer than 10 years’ experience increased their cash allocations, as opposed to 29% of those with more than 10 years.

Laidler adds: “The old adage, ‘time in the market beats timing the market’, clearly resonates with the more experienced investor base, and many will have been rewarded with stellar returns from the S&P 500, Nikkei and elsewhere in 2023, if not from UK stocks.”

How to allocate to cash on an investment platform

Many investors will have separate savings accounts, such as fixed-rate savings bonds or cash ISAs, which they will use as their cash allocation.

But you can also hold cash within your investment accounts. The issue with this is that you may not earn much interest.

Our investigation into how much interest investment platforms pay on cash holdings reveals that most pay far below the Bank of England’s base rate. Some pay less than 2%. One platform - Barclays Smart Investor - does not pay a penny in interest on cash held in stocks and shares ISAs and Sipps.

So, check carefully to see if you are actually benefitting from a decent amount of interest if you decide to park some of your investment portfolio in cash.

An alternative is to choose a money market fund or cash fund. The best ones yield more than 5%.

Laith Khalaf, head of investment analysis at AJ Bell, comments: “After many years of near-zero interest rates, it’s perhaps no surprise to find some investors filling their boots [with money market funds] given the yields on offer look far more appetising.”

Another option is to use an investment platform’s savings account service. A growing number of platforms now offer this, such as Hargreaves Lansdown, AJ Bell, Interactive Investor and Charles Stanley.

The advantage with this is that you can see all your assets in one place: your savings account will be alongside whatever investment products you hold on the platform.

The accounts are offered by a range of banks and building societies. They tend to be fixed-rate and competitive. For example, AJ Bell’s best one-year fix is from National Bank of Egypt, at 5%. This compares to 5.5% for the best one-year account on the open market.