Reinvestment risk refers to the risk of the current interest rates on cash deposits decreasing given the likely reduction of those rates in the medium term.
As central banks are poised to adjust interest rates, the future returns on cash investments could reduce, impacting the income (interest) returns available. We feel it’s therefore an important time and opportunity to investigate the possibilities of investment for income in other assets.
Primary purposes of cash:
- certainty of value for upcoming commitments
- lower-risk exposure and income generation through bank interest
- reinvestment risk:
- income risk: falling interest rates could reduce returns – a drop from 5% to 3% means a 40% decrease in annual income
- opportunity risk: delaying investment decisions may increase the purchase cost of alternative, higher-yielding income investments
- current environment:
- inflation has fallen to 2% (ONS, June 2024)
- analysts predict interest rate reductions, potentially as low as 3% by late 2025, compared to today’s 5%
If interest rates fall, the current attractive rates on short, mid-term deposits may no longer be available. This could lead to a substantial decrease in your annual income from cash investments. Additionally, as interest rates decrease, the cost of investing in alternative assets (such as bonds or equities) may rise, making it more expensive to diversify your portfolio in the future.
What are my options?
- an important part of your plan is to maintain appropriate cash positions for known needs and as an integral part of your risk management strategy
- explore alternative assets for higher long-term income returns; alternatives include bonds, equities, and real estate investment trusts (REITs), to name a few
Balancing cash holdings with other investment opportunities can help mitigate risks and potentially enhance your returns. In our upcoming series, we will provide details of income-generating investments, including bonds, equities, and REITs, which currently offer attractive qualities for income.
Important information
As with all investments, your capital is at risk. The value of your investments and the income from them may fall or rise and there are no guarantees. Past performance is not a guide to future returns. The content of this email is for information only and does not constitute advice.
