Is cash really king?

Q I am 56 years old, and about to pay off my mortgage when my endowment with Prudential (ex Scottish Amicable) matures this year. I will then own two properties in Scotland.

I will retire when I am 60 years old from my present company. I have cash stashed away in various building societies and mini cash ISAs. I should therefore retire on a reasonable pension plus capital.

Fortunately due to my wife's caution, I did not go too deeply into stock market investments, although I had total investments of around ?30,000 which is now worth about ?24,000, having got caught up with the poor-performing Aberdeen Technology fund, Gartmore, Investec and a few shares.

I think that I should get out of the stock market and place my cash in safer investments, such as building societies and bank accounts.

I am concerned about the security of the stock market, having read about accountancy irregularities; directors leaving their companies with large payoffs; no growth forecasts; very high capital values on companies which do not seem to be producing anything and so on.

However, financial advisors just seem to want to invest my money in the markets. Is the present market climate akin to a balloon that has been inflated and requires constant pressure (ie additional investments flowing in) to keep it functioning? Would you agree that cash is king at the present time and for the foreseeable future?

IC

A No I wouldn't agree that cash is King. I think cash is a negative investment(especially after tax has been deducted) suitable mainly for people unable or unwilling to take risk or needing instant access to draw money for some particular need.

I keep cash, for example, to cover school fees and tax bills. I can understand why many people will share your opinion of the stock market, after the losses suffered during the past five years and the outrageous behaviour of some company directors.

Nevertheless it should be remembered that there was a long period when shares provided an infinitely better return than cash. Longer term investment statistics still back this up.

At present the very high returns achieved from the stock market in periods of the l980s and l990s are unlikely to be repeated whilst inflation and interest rates remain low. However, I believe that the risk of investing in shares is worthwhile, especially for someone like you who will have a regular pension income that will need to be protected against inflation.

If you really want to sleep soundly at nights you could try index-linked gilts and keep a fair proportion in cash. In the long run, though, I think you would do better from a more balanced portfolio.