The new year is a natural time for us all to reflect on the year that has passed and look to the opportunities that the year ahead might hold.
Compared with the outlook this time last year, it appears that there are growing grounds for optimism.
In 2023, higher interest rates at the banks led many people to seek the security of cash ISAs. At the same time, interest rates continued their upward march, with five increases taking the Bank of England base rate from 3.5% at the start of 2023 to 5.25% today*.
As a result, large numbers swapped their stocks and shares ISAs for cash ISAs. This was a perfectly understandable reaction to rising rates by cautious customers.
But the commentary now suggests that interest rates may have peaked.
Despite an uptick in the UK's inflation rate in December 2023, the belief amongst some commentators is that interest rates will be cut this year.
Inflation has fallen quicker than expected, and although it still remains high, predictions are that it will fall below the Bank of England's 2% target in April. This would put policymakers in a position to cut interest rates around June.
This could significantly weaken the case for holding cash, so what next?
History tells us that cuts to interest rates are likely to act as an immediate stimulant to financial markets.
It’s easy to imagine that growth in capital markets will be significantly boosted when interest rates fall, or even if enough people anticipate that a fall is imminent and sentiment switches.
But when is the time to put risk back on the table to get a better return, and how much risk are you prepared to take?
There’s no doubt that the potential for volatility persists; ongoing wars, unpredictable oil markets, a general election and upside inflation pressures are all in play and can move markets.
Those who are risk-averse could be tempted to resort to a tried-and tested pound cost averaging strategy, by making regular contributions to investments to try to smooth the ups and downs of the market.
At the other end of the spectrum, the more bullish may decide to go all in before capital values potentially start to rise.
What are the options?
You’ll be pleased to hear that there is a middle ground. Smoothed funds, like Wesleyan’s With Profits Fund, invest across a range of asset classes, such as real estate, commodities, stocks, and bonds.
An actuarial mechanism is then employed where, during times of strong fund performance, some returns are held back. These are then re-distributed during periods of weaker fund performance, reducing volatility and moderating risk.
Wesleyan’s With Profits Fund is managed by an award-winning** in-house Investments team - consisting of Fund Managers, Property Managers, Analysts and a Sustainable Investment (SI) Team. With over 150 years of combined experience between them, the team continuously strives to outperform the markets.
Wesleyan has been helping people reach their financial goals for 182 years, and a large part of that longevity is down to the fact we are a capitally strong mutual. Without shareholders, it has the scope to invest with a long-term approach, removing the pressure to pursue short-term gains.
It also gives us the opportunity to control the amount of reserves we hold, directly impacting our financial strength.
Returning from cash
Smoothed funds can be an effective way for customers who have become more risk averse in recent years to dip a toe back into investing.
While no one can predict the future with certainty, there seems to be an increased optimism in investment houses and the mood music around equities is becoming noticeably more upbeat.
For many, the decision to go to cash will have been a short-term reaction to a period of elevated uncertainty.
Now that uncertainty has eased, might it be time to take on a bit more risk?
If so, smoothed funds can be a stepping stone, enabling you to invest in real assets that can outperform inflation.
Cash may have been king in 2023, but in the medium to long term, it will almost inevitably lose its crown.
Please note that past performance is not a reliable guide to future performance and the value of your investment, and any income can go down as well as up, so you could get back less than you invested.
* Bank of England
** Wesleyan’s Investments team have won multiple industry awards, including Responsible Investor of the Year at the Insurance Asset Risk Awards 2022 and Investment Team of the Year in 2023.