“Cash is King” or is it? Why diversification is important
Andrew Tricker, 17 January 2026
Andrew Tricker, 17 January 2026
When it comes to long-term investment, cash has traditionally been viewed as a safe haven. However, with little increase in the Bank of England’s base rate for many, cash is not as advantageous as it once was.
It’s time to rethink your investment strategy and consider the benefits of diversification to secure the returns you want.
While cash savings may have offered competitive rates in recent years, it was never intended to be a long-term investment strategy.
Cash is heavily influenced by economic factors, meaning its value fluctuates as inflation erodes purchasing power.
Additionally, cash is generally less tax-efficient, as it is taxed as income rather than at the more favourable capital gains rate, which could be limiting your potential returns.
Instead of relying solely on cash, it’s crucial to diversify your investment portfolio. While keeping some cash for liquidity is still important, investing in assets, such as stocks, bonds and property can help protect your wealth from inflation.
Both stocks and property have the potential for a higher return on investment (ROI), offering you a passive income that cash alone simply cannot provide.
Diversification ensures that your investments are not overly exposed to one asset class, reducing risk and improving the likelihood of sustained growth.
To give some indication of the potential for returns in cash vs global stocks and funds, over the five-year period to the end of 2024, global stock indices returned roughly sixty to eighty per cent in total, according to data from AJ Bell. This is equivalent to annualised returns int the mid-teens before inflation is factored in.
In comparison, cash saving over the same period have grown much slower with typical cash ISAs growing at a rate one to three per cent.
This means that a saver in cash would see only a modest increase in wealth compared with much stronger growth from equity markets over the same time
Over ten years, the difference becomes even clearer. If stocks and shares ISA or global index returns averaged around nine per cent per year, a lump sum invested at the start of the decade would have more than doubled in real terms by the end of 2025.
By contrast, cash savings averaging around one to two per cent per year over the same ten years would scarcely keep pace with inflation, yielding much lower real total growth.
Even in the short term there is a benefit from investing, with AJ Bell showing that a £20,000 lump sum invested in October 2024 would have grown to £22,612 in North American funds, compared to £20,698 in a cash ISA and £19,661 in Gilts.
Inflation over the same period rose to £20,760, which means that cash savers would have fallen behind in real terms.
While diversification is key for long-term growth, cash remains vital in certain scenarios.
It’s essential to retain some liquidity for short-term financial needs, such as emergency funds, holidays or unexpected expenses.
Having cash on hand provides the agility and flexibility to respond quickly to changing circumstances.
The trick is finding the right balance: keep enough cash for immediate needs while investing excess funds in a way that beats inflation and improves tax efficiency.
We understand that every client’s financial goals are unique. Our team of experts can help you develop an investment strategy that is tailored to your needs, ensuring that your portfolio is diversified, tax-efficient and positioned for long-term success.
For professional advice on diversifying your investment strategy and protecting your wealth, get in touch with Director, Andrew Tricker (andrewtricker@lfwm.co.uk).
The information included in this article may be subject to changes in taxation following its publication. This article is intended for informational purposes only and does not constitute advice.
