Six months ago I put half my pension in cash. Did I do the right thing?

Six months after I swapped half my pension investments for cash, perhaps it’s time to re-evaluate that decision and ponder whether it was made too hastily. A reappraisal looks especially timely in view of the recent plethora of important financial events: the Budget, the election of Donald Trump and a second cut in Britain’s official cost of borrowing.

To recap briefly on my original decision, a combination of realising that I might want to call on my retirement savings before long and a scary-looking geopolitical climate prompted me to seek the safety of cash funds for about 50% of my pension.

I recently checked on the financial consequences, so far at least, of that decision. Rather predictably, I would have been better off had I done nothing. The cash fund had produced a decent enough return of about 2.4% over the six months or so since I made the switch but the fund in which I was invested previously, essentially a global tracker, had risen by more than 7%.

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I don’t, however, find myself regretting the decision, any more than I regret having bought car insurance after an incident-free year on the roads: the loss in performance of my investments is the price I paid for peace of mind. But I should, as a simple matter of good portfolio housekeeping, review the prospects of my current holdings against what I might get if I changed them.

What can I expect in the way of returns if I do nothing with the money I parked in cash funds? The factsheet for the Fidelity Cash Fund into which I switched roughly half my savings says the expected yield over the next year (which is rather obscurely called the ‘distribution yield’ in the literature) is 4.96%, or 5% if we want a round figure. Please note this yield is not guaranteed.

The first thing to say about this return is that it is well above the current rate of inflation of 2.3% in Britain. I can remember long periods in the relatively recent past when investors would have given anything for the opportunity to earn a positive real return on a very safe asset. So in that sense I can feel happy with the investment, at least while that gap between the return and the rate of inflation remains.

But the benign circumstance of being able to make a real return on my money with very low risk may not last long. Certainly a real return from cash of more than 2.5%, as currently available, looks exceptional and unlikely to last: data from Barclays’ authoritative Equity Gilt Study 2024 shows that the after-inflation return on cash in Britain has been a measly 0.7% a year over 50 years (over 124 years, the longest period quoted, the annual real return on cash is 0.5%; it has been minus 3.1% over the past 10 years and minus 1.8% over the past 20 years). Please remember past performance is not a reliable indicator of future returns.

If the good times for real cash returns do indeed come to an end soon, I’ll need to consider whether to put money back into the stock market. I’ll take into account two things – the geopolitical climate and the market’s valuation – on top of my own financial circumstances and needs.

As far as geopolitics are concerned, a calmer and more stable outlook for relations between the superpowers would be welcome; currently there is at least a chance of serious confrontation between Russia and America over Ukraine and between China and America over Taiwan. Add to that the unforeseeable consequences of the incoming American president’s call for severe tariffs on China especially, with potentially enormous repercussions for that country’s already beleaguered economy, and the future looks concerning.

Here I should repeat something I said in my original article: I would not let this put me off the stock market, whose long-term returns are virtually unbeatable (4.8% a year on top of inflation over the past 124 years, says the Barclays Equity Gilt Study, compared with that 0.5% figure for cash), were it not for the fact that I may need to call on my pension savings in the next few years. When money may need to be spent so soon, it’s risky to keep it invested in the market.

This is especially true when stocks are looking expensive – as they are now. Wall Street, which dominates the global stock market, was trading at 35 times cyclically adjusted earnings at the end of September, which is very high by historic standards. There is a wealth of research (for instance here) to show that, when valuations are this stretched, returns in subsequent years tend to be anaemic.   

I’m not the only one to find the combination of an expensive-looking stock market and a risk-laden global backdrop worrying. The Bank of England said in its Financial Stability Report published in June that valuations of financial assets were ‘vulnerable to a shift in risk appetite that could be triggered by factors including a weakening of growth prospects, more persistent inflation, or a further deterioration in geopolitical conditions’.

Another sign that the US market at least is looking expensive is that Warren Buffett, the world’s most famous investor, has been liquidating some of his stock holdings, including in Apple, and leaving the proceeds in cash. His company, Berkshire Hathaway, now has $325bn in cash, which is 28% of its asset value – the highest level since at least 1990, according to a report in the Financial Times.

In May Mr Buffett told investors at Berkshire Hathaway’s annual meeting, also known as ‘Woodstock for capitalists’: ‘I don’t mind at all, under current conditions, building the cash position. When I look at the alternative of what’s available, in the equity markets, and I look at the composition of what’s going on in the world, we find it [the interest rate available on cash] quite attractive.’

Not all stock markets look expensive, of course. London’s, for example, seems pretty reasonably valued – and I have plenty of exposure to it via the half of my savings that are not in cash. I’m not sure I’d want to commit even more to it right now.

Overall, then, I’m happy with the switch I made six months ago and not inclined to reverse it now. I will of course look at the decision again as circumstances evolve and will report any big changes here.

Past performance is not a reliable indicator of future returns

Source: Morningstar from 31.10.19 to 31.10.24. Basis: bid to bid with income reinvested in GBP. Excludes initial charge.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a pension and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension will not normally be possible until you reach age 55 (57 from 2028). The value of shares in cash or money market funds may be adversely affected by insolvency or other financial difficulties affecting any institution in which the fund's cash has been deposited. An investment in a money market fund is different from an investment in deposits, as the principal invested in a money market fund is capable of fluctuation and is not guaranteed. Fidelity’s money market funds do not rely on external support for guaranteeing the liquidity of the money market funds or stabilising the NAV per unit or share. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.