Investors dropped their cash allocations to the lowest level in three years in the final quarter of 2023, according to new findings by Interactive Investor.
Cash allocations among the firm’s clients fell to an average of 8.9% in the fourth quarter, down from 11% in 2022.
Keeping money stored in cash savings accounts was popular when high rates allowed people to earn more interest on their savings and was an attractive alternative to investing in volatile equity markets. However, improving market conditions may have created a more appealing case for investing over holding cash.
Cash allocations may have dropped, but investors took advantage of high interest rates by locking in above average yields on fixed income assets and corporate bonds. Allocations to these investments rose to 2.5% in the final quarter of 2023, up three-fold from the average 0.3% allocation among ii clients at the end of 2022.
Myron Jobson, senior personal finance analyst at Interactive Investor, said: “Waning cash positions could point to growing confidence in equities following the easing of factors that have weighed on markets – namely inflation.
“While many of our customers are likely to have separate savings accounts, a large number have also sought to reap the benefit from the high interest rates environment via gilts and bonds while they still can, with interest rates now tipped to fall quicker than initial predictions.”
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The latest report from Interactive Investor also found that investors aged between 18 to 24 made a greater return in the last three months of 2023 than older age groups, climbing 6.4% over the period – something Jobson credits to their high allocation to investment trusts.
Investors in this age cohort held 27.7% of their portfolios in trusts, versus the 20.2% allocation among all other age groups. Shrinking discounts on these investment vehicles likely gave people who held them an added boost in the fourth quarter, according to Jobson.
Indeed, the average trust discount peaked at 16.9% in October last year, before narrowing to 9% by the end of 2023.
Jobson added: “Younger investors have seemingly benefited from their higher-than-average exposure to investment trusts, many of which have seen discounts reduced off the back of an improved economic outlook.
“Holding investment trust shares when they are trading at a discount while the ability for investment trust managers to gear can potentially produce a better return on the capital invested – although losses can be exacerbated during periods of underperformance.”
See all: The AIC: 48 investment trusts produce yields of 4% or more
Young people may have stormed ahead in the latter quarter of 2023, but experience in the market paid off in the long term, with investors aged over 65 making the highest returns over the past three years.
Nevertheless, the average consumer investor beat professional investors over the past three years, climbing 11.8% while the IA Mixed Investment 40-85% Shares sector – a useful comparator to private portfolios due to its mix of assets – was up 8%.
Jobson said: “One of the key takeaways from our research is even when markets are choppy, it is still worth keeping your money invested. Despite having to navigate through some dizzying twists and turns in the investment landscape in 2023, the typical ii customer portfolio generated inflation-beating returns that also trumped returns on cash savings.
“Of course, investing is a long-term discipline, and this index won’t always make comfortable reading, given the intrinsic ups and downs in markets, but the key to success is avoiding knee-jerk decisions and maintaining a well-diversified portfolio.”
