Despite the Bank of England keeping the base rate at 0.5 per cent for more than 40 months, not to mention the corrosive effects of inflation, investors in the UK are, on average, holding over a third (36 per cent) of their portfolios in cash, according to research by Investec Wealth & Investment.
So they will welcome the fall in Consumer Price Index inflation (CPI) to the lowest levels in almost three years - 2.2 per cent, down from 2.5 per cent last month.
To beat CPI, basic-rate taxpayers will need an account paying at least 2.76 per cent to gain a benefit in real terms from their savings, increasing to 3.68 per cent for higher-rate taxpayers, and 4.41 per cent for 50 per cent taxpayers.
According to MoneySupermarket.com, for basic-rate taxpayers there are now four easy-access accounts, 16 cash individual savings accounts (Isas), 144 fixed-rate bonds, 61 fixed-rate Isas and 19 notice accounts that beat the eroding effect of inflation. For higher-rate taxpayers there are still no easy-access accounts that beat inflation. However, 12 fixed-rate bonds and three fixed-rate Isas beat inflation.
Investec's research shows that the majority (61 per cent) of investors who increased their cash allocation over the past year were driven by the need for safety and a fear that investment products would fall in value. Only 9 per cent of investors increased their allocation to equities and other investment products.
While uncertainty has prompted a flight to safety, Investec recommends that investors also consider the UK stock market, which on a PE ratio of 11 is looking cheap relative to history. Analysis shows that the stock market has generated the best returns over a subsequent 10-year timeframe when the PE ratio was between eight and 12. However, the worst years to invest were when the PE ratio was between 17 and 25.
Chris Hills, chief investment officer at Investec Wealth & Investment, says: "Investors with particularly large cash holdings should think twice about this strategy over the longer term. It's important to get the balance right between asset classes and we would argue that for most investors there is a strong argument to maintain a diversified approach, including equities, bonds and alternatives. It should be remembered that cash has been the least rewarding asset class in the long term."
