Is holding cash in your portfolio costing you?

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and, if you are unsure of anything please contact an expert adviser.

There are many benefits to holding cash. It’s accessible in an emergency, won’t be affected by stock market falls, and can earn interest in the bank. However, there is a silent enemy: inflation. If the price of goods and services is rising by a higher rate than you’re receiving in your savings accounts, your money will lose value.

So, what should you do? Here we explore the cost of holding cash and suggest investment funds that may offer a compromise.

Inflation reminder

First, let’s have a quick reminder about inflation. This is a term used to describe the rising price of goods and services, expressed as a percentage. Goods include food, televisions or even cars, while services mean everything from beauty treatments to train tickets. The Consumer Prices Index (CPI) compares how much they cost today with what they did 12 months ago. When inflation is 4%, therefore, prices are 4% higher than the previous year.

Interest rates reminder

The Bank of England is tasked by the UK Government with keeping inflation stable at 2%. If it starts to rise, the traditional response is to increase interest rates. This has the dual effect of making borrowing more expensive and saving attractive. As a result, people are less inclined to spend and inflation can start to cool. Interest rates started increasing – from their all-time low of 0.1% – in December 2021 and gradually rose to their current level of 5.25%* in August 2023.

Recent inflation

The cost of living increased sharply in the UK during 2021 and 2022 after the Covid-19 pandemic and the annual rate of inflation hit 9.6% in October 2022** before starting to retreat in the wake of the Bank of England’s interest rate hikes. The latest CPI figures reveal inflation rose 4.2%** in the 12 months to January 2024. This was unchanged from the previous month but still ahead of the Government’s 2% target.

How have prices changed?

The Bank of England’s inflation calculator shows how prices have increased. For example, something that cost £100 a decade ago in 2014, would be £131.53 today***. The differential is even more stark over longer time periods. A £100 item in 2004 would now be worth £171.79*** after 20 years of inflation. And how about after three decades? Well, that £100 item will have doubled to £200.83***. So, that money tucked under your bed will have far less spending power today.

Fund alternatives to holding cash

So, what are your alternatives to savings accounts?

Well, the VT Chelsea Managed Funds range are worth considering. There are four such portfolios: VT Chelsea Managed Monthly Income, VT Chelsea Managed Cautious Growth, VT Chelsea Managed Balanced Growth, and VT Chelsea Managed Aggressive Growth. The entire portfolio has outperformed their relative sector since launch.

Let’s take a quick look at each in turn:

VT Chelsea Managed Monthly Income. This portfolio could meet your needs if a cash account isn’t quite cutting it and you like the idea of an income fund. This fund invests in a variety of income funds, whose underlying assets can include UK and overseas equities, bonds, gold and targeted absolute return strategies. The fund continues to grow its income and the yield is currently 5.7%. The fund has returned 41.4% for investors since launch compared to 16.5% for the IA Mixed Investment 20-60% Shares sector^.

Next up is VT Chelsea Managed Cautious Growth. This fund could be for someone that wants their savings to grow over the long term but aren’t comfortable with short-term equity market swings. This fund invests in a variety of assets to create a diversified portfolio. The underlying holdings are often less correlated, which reduces the risk of everything potentially dropping at the same time. Overall, this portfolio’s focus is on lower-risk funds that are defensive in nature and can include assets such as equities, bonds, property and gold. The fund has returned 26.8% for investors since launch compared to 16.5% for the IA Mixed Investment 20-60% Shares sector^.

The third portfolio is VT Chelsea Managed Balanced Growth. This fund could be suitable for those wanting to grow their money over the long term. If you want to aim for higher growth than the cautious portfolio, but you’re not really an aggressive investor, the balanced fund seeks to achieve an equilibrium. Diverse, yet complementary, funds will be held in this portfolio. The target equity weighting is typically between 50% and 70%, but the asset allocation will vary depending on market conditions. The fund has returned 41.4% for investors since launch compared to 29.3% for the IA Mixed Investment 40-85% Shares sector^.

The VT Chelsea Managed Aggressive Growth fund is an option for those wanting to take a higher level of risk to give you the best chance of long-term gains. This aims to grow money over the long term by investing in stock markets around the world. This makes it potentially more volatile than other funds in the range. The fund can include more niche funds - such as those focused on single countries or particular sectors. The fund has returned 54.2% for investors since launch compared to 31.9% for the IA Flexible Investment sector^.

*Source: Bank of England, data at 26 February 2024
**Source: Office for National Statistics, CPIH annual rate
***Source: Bank of England inflation calculator, data to January 2024
^Source: FE Analytics, total returns in sterling, 5 April 2017 to 26 February 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.