Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

THE questions you sent us in anticipation of this quarter’s Investment Outlook offer a good insight into where investors’ minds are right now. As well as China, commodities, corrections and crypto, lots of you appear to be thinking about cash. Indeed, many of you are considering upping your allocation.

Some have already taken the plunge. The Fidelity Cash Fund was the fifth most popular fund on Fidelity’s Personal Investing platform last month, having not even made the top 10 in August.

There are two reasons why investors are now moving into cash. One of the questions we received touched on the first:

“Would you be inclined to now, temporarily, go into cash awaiting a major correction?”

Markets are looking increasingly wobbly right now. Supply chain disruptions, a gas crisis, tumult in China, rising inflation - all are contributing to fears of an impending “correction” in the market’s upward trend.

If markets were to turn sour and other asset classes like bonds and equities fell, cash is the only one that can guarantee it won’t lose money (allowing for inflation, of course - more on that below). That makes it a good anchor upon which to limit your losses.

The other reason you’d hold cash right now was helpfully covered by another investor:

“With the increasingly bleak economic outlook, would you be retaining your ISA allowance as investable cash to then feed it in further down the line?”

Market volatility is scary, but it can also offer up opportunities. If you’re able to invest when prices are at their lowest, you stand to benefit from a subsequent recovery.

For opportunistic investors, holding a small allocation of your portfolio in cash while markets fall makes sense. Cash is more ‘liquid’ than other assets, meaning it gives you maximum flexibility to strike while the iron’s hot.

Of course, cash is only worth holding if you do something with it. There’s no point using it as a windbreaker if you’re still holding it after the storm has passed. Likewise, knowing when to reinvest is no easy task. Cash’s liquidity is a plus, but using it effectively requires discipline.

Moreover, the age-old risk remains. As prices rise your cash stands still. That means any cash you hold is guaranteed to lose money in “real”, inflation-adjusted terms.

The problem isn’t exclusive to cash, but whereas other asset classes can at least try to keep up with inflation through return or yield, cash can only tread water.

As such, it’s not worth moving all your money here. Think of your cash allocation as a buffer against any falls rather than the mainstay of your portfolio. An allocation of around 5-10% could be an option, but the exact figure will depend on your personal circumstances. If you’re approaching retirement you may want to add a little more - if time is on your side and you’re prepared to ride out any stormy waters, you may want to hold a little less.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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