You’re a High-Net-Worth Investor, but cash is eroding your wealth: Here’s how to protect it
Tax, market swings, inflation. Whichever way you look at it, your wealth is at risk.
High-Net-Worth Investors are often encouraged to seek specialist tax advice to make sure they stay tax efficient and compliant across the jurisdictions in which they hold assets.
But of the three risks listed above, it’s inflation which is often least understood – and consequently the one which ends up posing the greatest threat to the real value of your money over time.
As inflation increases and prices rise, it doesn’t take long before the purchasing power of cash starts to dwindle.
What could £100,000 look like in 10 years?
Assuming you held cash in a savings account with 2.5% annual interest, you would have £128,008 after 10 years, but its real value (spending power) after inflation would be £105,012.
That same £100,000, if stored as cash in a cupboard or under a mattress, would by contrast be worth just £82,035 after the same period.
Disclaimer: This example is used for illustrative purposes only: actual inflation, interest rates and outcomes will vary over time. The illustration assumes a standard fixed interest rate of 2.5% per annum, with no withdrawal of capital during the full 10-year investment period. It also assumes an average inflation rate of 2% per annum and does not consider taxes or other charges that may apply to the earnings.
That’s a meaningful difference over the long term.
When choosing where to keep your money it’s important to consider that interest rates on savings offered by your bank rarely keep up with inflation. Simply leaving money in an account may not be enough to protect its value long into the future.
Diversifying your investments can guard against this. By working with a trusted wealth manager or financial adviser, you can build a properly diversified portfolio, tailored to your unique risk appetite, investment preferences and long-term goals.
But remember no investment is risk free, and you should always consider how long you want to invest for without touching the capital.
Why does cash erode value?
It’s a startling fact to any investor that one’s money should be worth less tomorrow than it is today.
Inflation – the increase of the price of goods and services over time – gradually corrodes the real value of cash, as the things it buys become ever more expensive.
Banks offer savers interest on their deposits, but these rarely beat the rate of inflation over their lifetime.
High interest savings accounts, which typically ask for a minimum period of investment, or stable long-term bonds offer comparable safety and flexibility, but they tend to provide muted returns compared with more diversified investment accounts.
High interest savings accounts, which typically ask for a minimum period of investment, or stable long-term bonds offer comparable safety and flexibility, but they may provide muted returns compared with diversified investment accounts. Some bonds offer a fixed rate of interest, and the principal amount may be protected or adjusted depending on the product. These can provide regular payments but may not keep up with rising costs.
How can you guard your wealth?
One of the most important questions to ask yourself before investing is, “when do I realistically need this money back?”
For investors, it's crucial to understand current market conditions and other factors – such as interest rates, market valuations, and asset-specific risks – when choosing where to place their money.
It’s also vital to ask yourself whether you have the knowledge or the capacity to stay on top of all the market considerations that might change your preferred allocations over time.
If the answer to when you might need the total capital or a large portion of it back is “sometime next year” or “sometime in the next three years”, then the balance of risk is likely to be stacked in favour of low risk/low return assets like cash, money market products or high quality government bonds.
But if your time horizon is longer – if you are saving for the future and not for the next couple of years – your appetite for risk is likely to increase significantly. Stocks, for example, can offer higher returns over the long term, but their performance is heavily influenced by a wide range of market forces. Bonds and other fixed income financial instruments may pay regular interest, but can be negatively affected when interest rates rise, reducing their value and returns.
That’s why building a diversified basket of assets tends to be an effective way of growing value while managing risk.
What can Cadro do for you?
Cadro crafts investment propositions that are aligned to your unique needs and goals.
Depending on your circumstances, time horizon, objectives and risk appetite, we offer ISAs, General Investment Accounts, SIPPS, Private Markets portfolios, and Family Office services which are all aimed at long-term wealth preservation and growth.
Relationships are vital to our approach: every Cadro client gains a dedicated Client Adviser and exclusive access to the Cadro app, so they can feel up to date with the latest portfolio moves, market insights and trading decisions wherever they are, whenever they need.
If you’d like to learn more about our investment process, from our monthly Investment Committees to the innovative content updates we produce for our clients, book a meeting with our client team or visit cadro.com to discover how we can supercharge your wealth journey.
Disclaimer: This article is intended for informational purposes only and does not constitute investment advice or a recommendation to engage in any investment activity. It does not take into account the investment objectives, financial situation or particular needs of any individual. Capital at risk. The value of your portfolio can go down as well as up and you may get back less than you invest.
