A notable impact of the Covid pandemic era has been a steady but significant build-up of Irish household deposits. Fewer opportunities for people to spend money on travel, services, entertainment, as well as unprecedented government stimulus, have been core contributors to this build up. Household deposits that were already considered bloated following a rush to cash after the financial crash of 2008 – 2010, increased by over 9% in 2021 to an incredible €135 billion at the end of last year.

 The risk of holding too much cash  

The European Commission predicts that Irish inflation will be 4.6% in 2022, while interest rates remain at 0% and in many cases are negative for large deposits. The simple fact is that Irish consumers will see the purchasing power of their cash dwindle in line with inflation. In the long run, the biggest risk of keeping too much cash on hand is the opportunity cost. Even in periods of higher interest rates, the real return on cash after taxes and inflation can be negative. Over the long run, generally only investments in real assets, including equity markets have the potential to earn returns that outpace inflation.

 When it makes sense to hold cash

During periods of stock market volatility, which we have seen over the past year or so, it’s totally understandable that cash feels safe, and can be looked upon as a security blanket of sorts. Holding cash on deposit cushions the blow of financial setbacks, such as unexpected expenses, a pay cut or a job loss. We recommend holding a cash reserve equal to 6 to 12 months of your household expenditure as a rainy day fund to help ease the financial burden of adverse life events that can occur to any of us, at any time. Without an appropriate level of cash in reserve, emergency spending needs could force the sale of your investment assets at precisely the wrong time. But in the long run, holding too much cash can do more harm than good to your financial well-being.

 Trying to time the market can prove costly over the long run

‘Buy high, sell low’ – research conducted by Schroders in 2020 shows how costly trying to time the market can be. The research examined the performance the MSCI Global Index, which reflects the performance of global stocks, over the recent two decades. If at the beginning of 2001 you had invested $1,000 in the MSCI Global Index and left it invested for the next 19 years, it would have been worth $3,071 by the end of 2019 (a total return of over 300%, or 6% p.a. compounded). However, if you had tried to time your entry in and out of the market during that period and missed out on the index’s 30 best days you would have actually lost money. The same $1,000 investment might now be worth $845 or $2,226 less, before any adjustment for the effect of charges or inflation. For this reason, we advise clients of the importance of ‘time in the market’ rather than ‘timing the market’ over the long term.

 Before you invest your money, develop an investment plan

We find that busy professionals tend to be time poor and only get to focus on investments intermittently, if at all. The problem with this approach is that it can lead to knee jerk reactions or decisions and makes people more susceptible to investing in a product or provider with a popular investment theme at the time. Or instead, they do nothing at all. These are examples of behavioural mistakes people commonly make when it comes to investing.

When investing money, it is important to first develop an investment plan. When we work with our clients to develop their personalised plan, there are several important elements specific to them that we consider; their investment beliefs and principles, competing goals, their current circumstances, their existing pension and investment assets, their timeframes, their capacity to take risk and their own appetite to take risk. Each of these factors must be considered carefully and must fully reflect their personal situation. Each is important, particularly in today’s challenging and volatile investment climate.

 If you have a large cash sum to invest, you need to have an investment strategy

Once you have an investment plan in place, it is important to take your time and easy your money into the market if you want to avoid the risk of bad timing. Euro-cost averaging is the strategy of spreading out the investment of your money periodically, buying at regular intervals and in roughly equal amounts. When executed in a structured and disciplined way, it can have significant benefits for your investment portfolio. This is because averaging into the market “smooths” your purchase price over time and helps ensure that you’re not investing all your money in at a high point for prices. This strategy also enables you to take advantage of buying opportunities when markets fall. Committing to this strategy means that you will be investing when the market or a stock is down, and that’s when investors make gains.

 Seek independent investment advice

Whether you are investing a large sum, or just saving and investing towards a particular goal, such as retirement at a particular point in the future, it is important to have an investment plan in place, developed through a process-driven approach with a professional investment advisor.