Moving on up from cash

But this doesn't mean you should move your cash into risk assets, because whether you do this depends on your individual circumstances - in particular, your risk appetite and time horizon.

Despite low interest rates and rising inflation, cash held in a UK regulated bank or building society is the best option if you have a short-term investment horizon of less than five years and do not want to lose any of your capital. The effects of inflation are likely to be less severe than, for example, a sharp fall in the stock market.

"If you want to move some of your cash into higher-risk assets you have to accept that your investments could go down, be prepared for volatility and take a five-year-plus or preferably 10-year-plus view," says Danny Cox, chartered financial planner at Hargreaves Lansdown.

Lauren Peters, chartered financial planner at Helm Godfrey, says before switching cash to higher-risk assets you should determine what that money is for, when you will need to access it and what the consequences would be if the end value fell short of what you need.

"If it is absolutely imperative to have the money back fairly soon and you couldn't cope with it being worth less when you need it, stay in cash," she says. "Generally, the times people get into trouble with investing is when they need their money back at a specific date in the future and haven't considered the risk profile until the date they need it. It's important to take interest in your investments at regular intervals so that you can change the risk profile to fit with your attitude, capacity and plans."

Patrick Connolly, certified financial planner at Chase de Vere, adds: "You need to check risker assets on regular basis to ensure that they are doing what you expect, and if you are taking income from them make sure you are doing this at a sustainable level."

If you hold assets other than cash, for example funds, charges will apply. "Sometimes, taking on only a small amount of risk will leave you in a worse position than staying in cash due to the impact of fees," explains Ms Peters.

There may also be trading charges for moving from cash to risk assets - exactly what you pay will depend on the platform or broker you use.

Even if you decide you can go up the risk scale, you should not move all of your cash into higher-risk assets as you should be aiming for a balanced portfolio. "Most people should have at least part of their assets in cash for emergencies," adds Mr Connolly.

For example, working people should typically have three to six months of their expenditure or salary in cash in case they get made redundant.

If you have a large portfolio and want some capital protection, you could hold as much as 10 to 20 per cent of it in cash.

First step up

If you have a long-term investment horizon then moving into investments that could offer a higher return is likely to be a good option, especially as you should have the time to ride out any falls. And over the longer term inflation can decrease the value of cash holdings.

Mr Connolly says people moving up the risk scale with their cash typically fall into two categories:

• those looking for better capital growth than that offered by cash; and

• those with lump sums to invest and or a relatively shorter time horizon.

Those looking primarily for growth should look to equities which are volatile but offer long-term growth potential. Mr Connolly suggests funds rather than individual equities as these spread risk better - a fund holds a basket of equities rather than focusing on just one or a few companies. And you should not invest at the riskiest end of equity markets, so Mr Connolly suggests avoiding specialist funds, for example those focused on single sectors such as healthcare or technology, and single country funds - in particular, those focused on emerging markets such as China, India or Brazil.

To further spread risk he suggests going for broad-based funds with a global mandate.

Options for investors going into equities for the first time include Rathbone Global Opportunities (GB00B7FQLN12). This fund's managers look to invest in 40 to 60 holdings mainly in developed countries. It is also well diversified by sector with substantial allocations to technology (23 per cent), consumer services (18 per cent) and financials (17 per cent). In terms of performance, the fund is in the first quartile of the Investment Association (IA) Global sector over three and five years.

Schroder QEP Global Core (GB00B5310487) is very diversified with 625 holdings and has a level of risk closely tied to that of MSCI World index. However, the fund has beaten the returns of this index over one, three, five and 10 years. It has an ongoing charge of 0.4 per cent, which is very low for an active fund.

An even lower cost option is HSBC FTSE All Share Index (GB00B80QFX11) with an ongoing charge of 0.07 per cent. Although this tracks UK-listed companies it includes a number of global multinationals such as HSBC (HSBA), British American Tobacco (BATS) and Royal Dutch Shell (RDSA).

Mr Cox thinks equity income funds are a good place to start as they invest in companies with a good record of making distributions, and you can opt whether to take pay outs from these funds or reinvest them if you do not need the income. Even if markets are choppy and their capital values fall, while you wait for them to recover you should hopefully still receive decent dividends.

Options include CF Woodford Equity Income (GB00BLRZQB71) run by high-profile manager Neil Woodford, who before setting up his own management firm in 2014 made outstanding returns with the Invesco Perpetual Income (GB00BJ04HX60) and High Income (GB00BJ04HQ93) funds. CF Woodford Equity Income aims for attractive long-term total returns by investing in quality companies that can deliver sustainable dividend growth, and has a yield of 3 per cent.

Threadneedle UK Equity Income (GB00B8169Q14) makes excellent total returns and is in the first quartile of the IA UK Equity Income sector over one, three and five years. It has yield of 3.8 per cent.

Mr Connolly suggests Artemis Global Income (GB00B5N99561), the best-performing IA Global Equity Income sector fund over five years, which takes a long-term total return approach to income rather than just focusing on short-term yields. He also suggests Newton Global Income (GB00B8BQG486), one of the best-performing funds over three and five years of which the managers take a thematic approach to investing.

Non equity options

For investors who have a lump sum to invest and a shorter time horizon, capital protection will be of some significance so they should not put it all in equities. Mr Connolly suggests diversifying via a combination of fixed interest and property, so an option could be a multi-asset fund. "Some of these can have high charges, in particular if they are a fund of funds," says Mr Connolly. "So maybe opt for one that directly invests in assets such as Investec Cautious Managed (GB00B2Q1J816) with an ongoing charge of 0.85 per cent."

If you are going to diversify your portfolio with individual funds then you will need to consider fixed income. "Fixed income provided security and income in portfolios but this is not the case any more because of central bank actions," says Mr Connolly. "So if you go into this area looking for capital security you could lose money."

But a way to mitigate this risk is strategic bond funds which don't focus on any one section of the fixed income market, meaning their managers can allocate to areas that look like the best options, and avoid problem areas. These funds can also be less vulnerable to rising inflation and interest rates as they can allocate to, for example, high-yield bonds or securities with floating rate coupons.

However, this ability to move around means the risk profile of a strategic bond fund can change quite substantially in a short period of time. So, for example, what may have been a relatively low-risk fund focused on high-quality corporate credits could substantially allocate to high-yield bonds. This means strategic bond funds are not suitable for low-risk investors.

Options include Fidelity Strategic Bond (GB00BCRWZS59) which has typically been at the lower end of the risk scale among strategic bond funds. This is run by experienced manager Ian Spreadbury with the aim of being a core bond fund delivering regular income, low volatility and some diversification to other asset classes including equity. It yields 3 per cent.

Mr Connolly also suggests Henderson Strategic Bond (GB0007502080), which currently has more than 40 per cent of its assets in high-yield bonds and yields 4.6 per cent.

Jupiter Strategic Bond (GB00B544HM32) has a third of its assets in government bonds and nearly half in corporate bonds. Its manager looks to understand the macroeconomic environment, and once he has formulated his views he decides in which bonds to invest. This fund is significantly less volatile than the UK stock market.

For property exposure Mr Connolly suggests funds that invest in buildings such as offices, retail units and warehouses - rather than the securities of property companies. Property securities are likely to move in line with equity markets so are not such good diversifiers. Options include M&G Property Portfolio (GB00B89X8P64), Henderson UK Property (GB00BP46GG64) and L&G UK Property (GB00BK35DT11).

Property funds hit the headlines last year because following the vote for Brexit a number of them stopped investors from pulling their money out of them, as they did not have enough readily realisable assets to meet the high level of redemption requests. However, by the end of last year most of these had lifted that restriction and investors could move money in and out as usual. But you should still have a long-term investment horizon if you invest in an illiquid asset such as this.

Mr Cox says that buy-to-let property is not a good option because your assets are concentrated in one residential property, in contrast to a property fund that owns several buildings. And commercial property does not necessarily move in tandem with residential property.

If you own your home putting money into buy-to-let would mean you are very exposed to one market.

Fund performance 

Source: Morningstar as at 10 May 2017

How to move up

How you fast move your cash into higher-risk assets depends on your personal circumstances.

Many investors drip feed their cash into the markets over time, which can be beneficial, for example, if you don't have much money. And feeding a fixed sum into markets on a regular basis - eg, once a month - means that when markets are expensive you buy less with your set sum, and when they are cheaper you buy more.

"Investing a small amount each month also gets you used to investing, which can be relevant if you are a first time investor and nervous," says Mr Cox. "You could then put in a larger lump sum at a later date if you wanted to."

This approach could also help you understand what your risk tolerance is if you are a relatively new investor.

However, if you are taking a multi-asset approach investing a lump sum is less of a concern because you are not putting all your money into equities.

Also make sure you invest in a tax-efficient way using wrappers such as an individual savings account (Isa). "Even if your investments don't initially incur tax you would hope that they would build up to a size where they would, so mitigate this by holding them tax efficiently," says Mr Cox.