The case for investing your cash
A run of disappointing economic data from the UK is undermining the chances of the Bank of England hiking interest rates in the near feature.
This will reinforce the very modest rates currently available from cash deposit accounts and is a clear reason to look again at the merits of instead investing your money in the markets.
You might think your money is safe, tucked away with the bank, and to an extent it is given the protection offered by the Financial Services Compensation Scheme, but you should not ignore the impact of inflation.
According to the latest Barclays Equity Gilt study, which is the benchmark for the returns from different asset classes, over the past ten years you would have incurred a 1.9 per cent annual ‘real’ loss from holding cash.
This is because the historically lower rates of interest over that period have failed to keep pace with rising prices, so the spending power of cash has been eroded.
Over the past ten years you would have incurred a 1.9 per cent annual ‘real’ loss from holding cash
Cash might feel like a safer option, but history suggests this asset class will significantly under perform compared to equities. Over the same ten-year time frame the Barclays data shows equities have delivered a ‘real’ return of 3.2 per cent and over every decade-long period running back to 1917, equities have out performed cash.
There has been significant volatility in stocks in the last ten years. However, stock markets often recover quickly from crashes. In hindsight 2009 was one of the greatest buying opportunities for shares in recent memory – only a year after one of the biggest ever stock market collapses.
If you have never invested before or have not invested for some time, funds are a good entry point as they provide diversified exposure to lots of underlying holdings and the investment decisions are made by an expert fund manager.
While cash is unlikely to deliver the returns required to hit your savings goals, you should always have some cash put by as an emergency buffer in case something unexpected happens in your life. It is also worth having some cash to hand in case markets fall and you can act on sudden price fall by buying equity in some great companies or funds.