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How to Approach Savings as Interest Rates Reduce

Gresham Wealth

2023 presented an opportunity for those with cash savings to take advantage of the higher interest rates on offer. Most banks increased their rates on their everyday savings accounts and introduced new fixed rate cash products to entice savers.

However, many of these fixed rates will likely reach maturity this year, and if, as is widely predicted, the Bank of England start to reduce interest rates, this will soon be reflected in the savings rates on offer. As such, continuing to hold large cash reserves may risk eroding their value over time.

As interest rates decline, it is crucial for savers to rethink their cash piles and consider an alternative approach to their investments. In this blog post, we will explore how clients can navigate this change and make the most of their savings.

Managing the Risk of Market Re-entry

The volatile stock market during 2022 and 2023 and the higher interest rates available during this time may have tempted investors to withdraw from the markets and invest in the ‘safe haven’ of cash. The prospect of entering back into the market at high prices can therefore be intimidating. However, waiting for the ‘perfect time’ to re-invest in the stock market, or avoiding markets altogether, is unlikely to be the best course of action. Trying to ‘time the market’ is notoriously difficult.

If entering back into the market is a concern, making regular monthly deposits may allow a ‘softer’ re-entry rather than making a single, large investment. This approach is known as ‘pound-cost averaging’ and takes away some of the risk of buying in at a single price.

Diversification and Balanced Portfolios

Diversification is the key to successful investing. Spreading investments across different asset classes and industries mitigates risk. By diversifying a portfolio, savers can benefit from the growth of different assets while minimising the impact of any one assets’ performance on their portfolio.

Taking a Long-Term View

The best strategy to avoid the ill-effects of market volatility is to stay invested for the long term. Keeping assets invested across a diversified portfolio in line with your risk profile helps to reduce overall volatility and improves your chances to earn more consistent returns over time.

Regular Review and Adjustments

Regular reviews of investment portfolios can help to ensure that investments are aligned with goals and risk tolerance. As market conditions change, savers may need to adjust their portfolios. Regular reviews, ideally with a financial adviser, allows savers to stay proactive and adapt to the ever-changing financial landscape.

Cash vs Investments – Finding the Balance

Savings have always been a crucial aspect of financial planning. Having money readily available in cash savings as an ‘emergency fund’ is a core strategy of financial advice.

However, there is a balance to be found between having funds available and holding too much cash reserves for long periods of time.

If lower interest rates start to re-emerge, it is important to review your overall financial plan. By adopting a long-term perspective, investors can withstand market volatility and take advantage of potential growth opportunities.

Financial advisers play a crucial role in helping savers navigate changes in market conditions and make informed decisions about their financial future. To start the conversation with us today and take a renewed look at your financial plan, please get in touch.

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