How much cash should I keep as a proportion of my investments, beyond a fund for emergencies? Inflation would suggest as little as possible, but I know lots of people who have moved a big proportion of their assets into cash as stocks have fallen, both to mitigate losses and be ready to buy when things pick up again. What’s the best cash strategy in a high-inflation environment?
Paul Surguy, managing director and head of investment management at Kingswood, recalls that former US president Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” Perhaps inflation is better described as a silent assassin: for most economies, it is always there, gradually eating away at the purchasing power of cash.
With price rises running at levels not seen since the 1970s, many have begun to ask what steps they can take to protect their assets. To appreciate the impact it can have on cash holdings, consider £1,000 in a bank today. At a current (and assumed consistent) level of inflation this will be worth £917.43 in a year’s time. In the UK, supply bottlenecks and the price of oil have intensified the increase. As these ease, it is hoped that inflation will naturally start to fall away.
Cash is held as the ultimate protection. Historically, for those with memories that stretch back to the 1990s and early 2000s, one might expect to get a little bit of interest on cash in the bank. However, even with interest rates rising across the globe, any interest received is both minuscule and irrelevant when compared with inflation.
So where can people go to protect their assets against inflation? Traditionally, property and equities would be the first port of call and should, within a certain risk tolerance, still be the best place. Inflation-protected bonds are a lower risk method of protecting investments.
However, all of these are higher risk than cash in the short term, as their values will fluctuate. This is why investors should ensure they have a diversified portfolio appropriate for their risk tolerance. There are also a wider range of alternatives, such as gold (the traditional inflation hedge) and uncorrelated assets such as low-risk, hedge fund type investments.
Having said this, cash remains the ultimate safety net for investors. Three to six months of income still feels like a sensible level of cash to maintain to cover any short-term emergencies. This can always be reassessed should inflation fall away or risk assets increase in value. We should also start to see a small increase in the interest paid by banks as central banks have clearly signalled that the direction for interest rates is upwards.
Current expectations are for the UK to have an interest rate of just over 2 per cent by the end of the year. In the US the number is closer to 3 per cent. Certainly, this is higher than we have been used to, though less than history would suggest is “normal”.
How can I settle holiday home dispute?
My mother recently passed away and left her estate, including a holiday house on the Sussex coast, to my brother and me. My brother, who is an executor of the will, does not appear to be in a hurry to sell the holiday house, even though this was always the understanding. Can I force a sale?
Kai Jones, a senior associate in the private client team at RWK Goodman, says it cannot be easy to deal with the loss of your mother and the fact that your brother appears to be reneging on the sale of the holiday home.
I presume that your brother is the sole executor and your mother’s estate is to be divided equally between the two of you. As executor, your brother has a duty to collect in the assets of the estate, settle any of your mother’s outstanding liabilities and administrative expenses, for example, legal fees. Once the estate assets have been gathered and liabilities settled, the executor is to distribute the balance to the beneficiaries.
In addition, your brother should be aware that as executor, he should avoid any possibility of a conflict of interest between his duties and responsibilities as executor and his personal wishes. As a beneficiary, you have the right to require that the estate is administered properly and in accordance with the will.
Therefore, if your brother has settled the estate liabilities he should distribute your share of the estate to you. The distribution would be by either liquidating the assets in the estate and distributing the cash equally or transferring the assets into your joint names.
From what you said, the will does not make specific arrangements for the holiday home and its sale was an agreement between you. While you cannot technically force your brother to sell the holiday home, you could suggest that if he wishes to keep the holiday home for himself in his capacity as beneficiary, he could reimburse you for your share of the holiday home from his own funds or from his share of the estate.
I would advise that you and your brother seek to resolve this amicably and mediation may assist with this. Legal action should only be considered as a last resort.
If you are unable to resolve things amicably and believe that your brother is acting improperly as executor, you can apply to the court for directions regarding the sale of the property. You could also apply to have your brother removed as executor if you are concerned that he is having an adverse effect on the administration.
If you made an application, the court will look at how the administration is being conducted and will act in the best interest of the estate. It will look at the terms of the will and ignore any agreement you and your brother may have made. I do hope that you and your brother are able to resolve the issue without legal intervention in order to avoid animosity.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Our next question
My wife owns a flat, which she bought with a mortgage before we met. She subsequently re-entered higher education and the flat is being rented out to support her financially while she studies. If we buy a house to live in (which we will jointly own), we may remortgage the flat as a buy-to-let. However, because of our current income disparity, the bank insists upon a joint mortgage on the flat, which they say will require my name to be added to the deed and a transfer of equity. If this happens, can my wife continue to solely disclose the rental income on her tax return, or would HM Revenue & Customs compel me to disclose some share of it? Are there any other tax considerations?
Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to firstname.lastname@example.org