Almost a third (30 per cent) of UK investors made additional investments in cash over the past year due to higher interest rates, research by St. James’s Place (SJP) has shown.

By comparison, 12 per cent increased their exposure to equities during the same period, and 12 per cent made further investments in bonds.

SJP conducted the research shortly before the Bank of England announced its decision to cut interest rates by 0.25 percentage points for the first time in four years.

Nearly a quarter (23 per cent) of research respondents said they planned to make further investments in cash over the next year if interest rates remained high.

Around one in seven (14 per cent) planned to invest more in bonds and 13 per cent expected to increase their exposure to equites over the next 12 months.

While many UK investors were turning to cash, SJP’s analysis of the performance of equities, global bonds and cash over the past 20 years found that remaining invested in markets delivered better long-term outcomes than increasing cash exposure.

For example, since 2004, equities had seen a cumulative return of 566 per cent, compared to a 96 per cent cumulative return from global bonds and 43 per cent from cash, according to data from FE Fundinfo.

Furthermore, these findings were “amplified” when the impact of inflation is considered, with SJP research highlighting that large cap stocks had consistently provided returns in excess of inflation.

Cash was found to have delivered a return of 1 per cent in excess of inflation over the past 50 years, compared to 8 per cent by small cap stocks, 4 per cent by corporate bonds, and 3 per cent by government bonds.

“August's interest rate cut to 5 per cent marked a pivotal moment,” commented SJP senior investment specialist, Nina Stanojevic. “We foresee more cuts but not a drop to near-zero levels. Rates will likely stabilise above pre-pandemic levels.

“This 'higher for longer' trend affects asset classes differently. While cash has been attractive with high rates, as our analysis shows, inflation erodes its value over time, potentially hindering long-term goals. Investors should use this rate cut as a wake-up call to diversify and consider higher-yielding assets such as equities and bonds.

“A diversified portfolio across asset classes and geographies is crucial for meeting long-term objectives. Equities offer attractive risk-adjusted returns, and bonds are appealing now due to higher yields, providing a chance to buy high-quality bonds at favourable rates.

"While recent market volatility may understandably be a cause for concern amongst investors, the current opportunity to ‘buy the dip’ and get back in the markets at a time when prices are relatively low, provides a good re-entry point for many.

“Ultimately, investing is for the long term and it’s important not to get too caught up in trying to time the market, and instead keep focused on your long-term goals.”

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