Millions Sitting on Over £100,000 in Cash May Be Losing Money to Inflation

More than 1.5 million individuals in the UK hold at least £100,000 in their Individual Savings Accounts (ISAs). However, leaving these substantial sums in cash accounts risks underperformance against inflation, potentially leading to a loss of real value over time.

Financial experts recommend investing this capital in a diversified portfolio that includes shares, bonds, and other assets to facilitate long-term growth. The optimal investment strategy is contingent upon an individual's risk tolerance and their timeline for accessing the funds.

Andrew Prosser of InvestEngine suggests a "core and satellite" investment approach. The core of the portfolio, for those prioritizing growth, could be a global tracker fund. Alternatively, for those seeking regular income, a global bond fund might be more appropriate. A global tracker fund offers low-cost exposure to thousands of companies worldwide.

For many investors, a balanced core comprising both equities and bonds is advisable. This core can then be supplemented with "satellite" investments. These could include commodities like gold, sectors with potential for outperformance such as healthcare or technology, or specific geographic regions deemed promising.

Dan Coatsworth, head of markets at AJ Bell, points out that tracker funds can serve as effective starting points for new investors. He advocates for allocating a portion of a portfolio to global equity funds, as this strategy avoids making specific calls on individual industries or regions. Tracker funds are also typically characterized by lower fees. Among global index-tracking funds, the Invesco MSCI World fund is noted for having the lowest charges, though it invests solely in equities and may therefore be more volatile.

To mitigate volatility, many portfolios incorporate corporate and government debt, alongside alternative assets like gold and property. During economic downturns, these assets can provide stability; gold often appreciates when other assets decline, while bonds generally exhibit lower volatility than equities. The proportion of bonds within a portfolio influences its steadiness of returns versus its potential for growth. More risk-averse investors typically allocate a larger percentage to bonds, while risk-tolerant investors favor equities.

For individuals with a medium risk appetite, a portfolio structure similar to the Wealthify Confident Plan, with approximately 45% in shares, 40% in government bonds, 4% in corporate bonds, and the remainder in alternatives, could be suitable. More cautious investors might opt for a structure akin to the Cautious Plan, with 10% in shares and 82% in bonds.

Multi-asset funds, such as Vanguard LifeStrategy, can be utilized to construct portfolios aligned with specific risk tolerances and timeframes. For long-term investment horizons, the 80% equities/20% bonds version is an option. Those planning for retirement might consider a 40% equity and 60% bond allocation. Alternatively, investors can combine equity trackers like the Invesco Equity Fund with bond trackers, such as the Vanguard Corporate Bond Fund or HSBC's Global Government Bond ETF, which are popular among AJ Bell clients.

Once the core equity and bond components are established, investors can use their satellite investments to target specific companies, sectors, or geographies of interest. For example, an interest in renewable energy could lead to investment in a specialist trust like The Renewables Infrastructure Group, which reportedly trades at a discount to its asset value. An investment in the space sector could be achieved through an exchange-traded fund like WisdomTree Space Economy.

For windfalls such as inheritances, it is advisable to shelter funds from tax as quickly as possible. Maximizing contributions to tax-efficient wrappers like ISAs and pensions can help mitigate capital gains and dividend taxes as the savings grow. An ISA allows for £20,000 per year, while a pension can accommodate £60,000, with both offering tax-free growth. However, pension funds generally cannot be accessed before age 55, a limit set to rise to 57 in 2028.