Principle 1.
Cash is important but ....
Before considering the problems of how to invest, investors need to discuss carefully with their Financial Adviser the appropriate amount of cash to retain in their portfolio for emergencies, for income and for commitments in the near future. This is fundamental.
Once this has been decided then the investor should avoid putting this cash into rising markets to chase gains, which increases the risk level above what they have carefully decided with their Adviser. Similarly, withdrawals from investments should be avoided in falling markets which could realise losses.
Cash can lose purchasing power due to inflation.
However, investment in real assets such as Shares, Property, Bonds, or Commodities like Gold which can beat inflation is needed to meet the reasonable investment expectation of active management aiming to increase their capital value. The Brunswick Investment Solution gives investors convenient access to these and many other assets.
The risk of cash losing purchasing power due to inflation has become less obvious to investors until very recently as the inflation rate has often been below the Bank of England target rate of 2.00% pa.
From the chart above it can be seen that 2.5% pa inflation will reduce the buying power of £10,000 to £8,000 in 9 years, £6,500 in 16 years and £5,000 in 25 years.
When an investor holds an appropriate amount of cash in reserve, then paper losses upon invested capital over the short term can be viewed rationally and the possibility of gain over the medium term is not sacrificed.