Recent statements made by the governor of the Bank of England Mark Carney suggest interest rates will remain low for some time to come, but Spear says this is still not a reason to put everything into risk assets.“It would be very easy to advise clients to grab the yields that are available from equities, however our industry has spent decades saying that the value of investments can fall as well as rise,” he said.
“We have to take account of our clients' capacity for loss, which covers both how they would feel if they lost money and secondly how that loss might affect their standard of living.”
Investors have until 5 April to use up their ISA allowance of £11,520, £5,760 of which can be cash.
The vast majority of ISA investors hold cash rather than funds but have consistently lost out in real terms, taking into account inflation.
Research from investment manager Nutmeg based on average interest rates and accounting for inflation shows that people who have invested their full ISA allowance in cash in each of the last 13 years have lost out in real terms.
Source: Nutmeg
The table shows that cash only returned a profit to investors in real terms in the first two ISA years, 1999 and 2000.
Shaun Port, chief investment officer at Nutmeg, says that the real fall in the value of cash ISAs suggests investors would have been better off putting the cash into a medium-risk portfolio of stocks and shares.
“If you’d invested the maximum in a cash ISA every year since they began, you would have put away a total of £56,040 by now.”
“With interest, that could have grown by nearly 20 per cent. However, factor in inflation and your total savings would have actually gone down in value.”
“Compare that to putting the same amount into a medium-risk portfolio of stocks and shares each year since 1999.”
“Your money would have gained in value every year but one and would have done better than the cash ISA for each of the last 15 years, bar none – again, that’s in today’s money, after accounting for inflation.”
Spear says investors shouldn’t discard the safety of cash without proper thought, but cautious investors could reasonably diversify into stocks and shares as well.
“If investors can open their eyes to both the risk and the potential of stock markets, then it is quite reasonable for a cautious client to commit a proportion of their cash into riskier assets,” he said.
For cautious investors willing to move away from cash, Spear advises them to look at funds in the IMA Mixed Investment 0%-35% Shares sector.
It is the most defensive of the mixed asset sectors, which are popular with investors looking for diversified exposure through a single fund.
Managers in this sector seek to provide low-risk returns by holding small amounts of shares along with more stable investments such as bonds.
Data from FE Analytics shows the £218m JPM Cautious Managed fund is the worst performer in the sector over three years, losing 0.21 per cent, compared with 12.97 per cent from the average fund.
The highest returns came from Scottish Mutual Cautious which has made 26.28 per cent over this time.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Spear has been advising investors with large amounts of cash in their ISAs to reinvest a portion of this into a fund that generates an income, then reinvest this in the same shares.
“I have been advising more established investors, with about £50,000 in cash, to take £10,000 out and invest it in a fund with medium risk such as Threadneedle UK Monthly Income, which has an excellent track record,” he said.
Data from FE Analytics shows the £640m Threadneedle UK Monthly Income fund has returned 45.21 per cent over the past three years compared with 37.31 per cent from the sector average.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Spear says that even though cash ISAs lose money in real terms, they have advantages apart from ease of access.
“Fundamentally, cash is cash,” he said.
“You may well be losing money in real terms but at least you can sleep at night.”
