The risk of switching panicked clients into cash

Helping clients navigate market volatility is a key way financial advisers can demonstrate their value, a JP Morgan Asset Management (JPMAM) commentator has said this week. 

Speaking to Money Management at the JPMAM Global Media Summit in London, head of global multi-asset strategy John Bilton emphasised that “there isn’t just one moment of risk”. 

He noted that financial advisers play a critical role in helping clients navigate the full spectrum of risks – including liquidity risk, reinvestment risk, market risk and event-driven risk – by providing context and clarity amid an increasingly complex investment landscape.

“Recognising that a portfolio should be optimising and properly allocating across those risk buckets is an important way of being unique in how you think about things,” Bilton said. 

He also highlighted the important role financial advisers play in reassuring investors and discouraging knee-jerk reactions, such as shifting their investments into cash during periods of market volatility.

VIEW ALL

View all

Research by the firm of cash versus a 60/40 portfolio found that over 35 years, three-quarters of the time, a 60/40 portfolio outperformed cash by an average of 7 per cent over one year. Over three years, it always wins over cash by a cumulative average of 21 per cent.

“Being invested is still the most important thing investors can do, but a lot think that being in cash is a really good idea,” said Bilton. 

“A lot of people think they can derisk their portfolio by moving into cash, which is attractive when rates are at 4–5 per cent. But it isn’t derisking; it’s just swopping one type of risk for another. You may be taking less market risk, but you are taking on a lot more reinvestment risk, and you really are at the mercy of where the central bank decides to go. 

“[The study results] really shocked me because the big question we get is reminding investors that it’s about being in the market, and that market volatility is normal. Hiding in cash just doesn’t work. People don’t realise that holding your assets in cash isn’t a riskless portfolio.”

Meanwhile, Karen Ward, chief market strategist for EMEA, said investors are often spooked by headline news and market movements, and see cash as a safe haven.

“Clients say, ‘You’ve talked about all this policy uncertainty. We don’t know what the White House will next deliver. We don’t know if it will be good news or bad news, so surely I should keep my money in cash?’. We are seeing that in the data, clients are keeping cash. In the UK, there has been £800 billion in additional savings since the pandemic, and half of that sit in cash,” she said.

“Why is that not the right thing to do when the world is so uncertain? It was tempting to do so when interest rates were at a 15-year high as you were being paid to sit in cash, but these are rapidly disappearing, so you are now losing money. We try to get our clients to think about the impact of inflation, and whether that is taking away cash than what a central bank is giving you in interest rates.

“Other clients say cash will still be there for them at the end of the year, but when we look through history, staying in cash is still the right thing to do. Even when bad things have happened, it is often better to have been in a balanced portfolio.”

A report by Russell Investments last year found helping clients to avoid making knee-jerk decisions, reweighting their portfolios, and encouraging clients to remain disciplined were the key things valued by advised clients.