Cash feels safe in a crisis – but history tells a different story

Holding your money in cash during some of the biggest crises of the past 40 years rather than investing would have done you more harm than good in the short and long run.

Data from JP Morgan Asset Management looked at how much a 60/40 portfolio of equities and bonds, respectively, would have made relative to cash in the year after the biggest geopolitical events since the 1990s and three years thereafter.

Starting with the first Gulf war and assuming you had the worst market timing possible and put your money into a multi-asset fund the day before each crisis happened, you would have averaged just under 9% total return a year later and more than 20% after three years.

From 9/11 onwards, there wasn’t a single instance where a 60/40 portfolio would still be down relative to cash on a three-year view, even if your market timing was about as bad as it possibly could be. This included the Lehman Brothers collapse, or the Eurozone crisis and Brexit.

If you’d put £100 into a money market fund in 1990, you’d have made £268.23 today, almost a 170% increase. Money market funds provide a cash-like alternative to investors, while aiming to return slightly above the rate offered in cash accounts. However, if you’d put that same amount into a ‘balanced’ multi-asset fund, your £100 would now be worth almost £1,100, nearly a 1,000% increase.

“Holding cash is something we hear lots about when the world is a scary place. But my argument would be that cash provides stability, but that it is not providing safety today in a world where inflation is eating away at the value of real cash holders,” Hugh Gimber, a global market strategist for JP Morgan Asset Management, explained at a recent conference in London.

Cash will still have a role to play in your financial planning, particularly for financial planning or if you’re planning to use your money in the short term.

And it’s especially relevant to investors today because inflation has been rising again thanks to the energy crisis caused by the conflicts in the Middle East and Ukraine disrupting oil supply.

Big geopolitical events, like the ones we’re contending with today “can sometimes encourage us to make bad decision”, and not invest, Gimber says.

“So my encouragement would be to just remember why the geopolitical environment is so challenging and make a good investment decision to become part of it,” he adds.