Why bother investing?

Sometimes in our research we come across articles that make a great point and we couldn’t have put it better ourselves. This is a good example from 7IM so we thought we’d share it with you.

Interest rates are at levels we haven’t seen since before the Financial Crisis, tempting people into cash, and away from investing.

With cash interest rates now at 5.25%, we’re getting asked “Why bother investing? Why don’t I just leave my money in the bank?” Well, there’s two things to remember. The first, is that the laws of capitalism still apply. So if cash sets the benchmark at 5.25%, anyone else who wants to get some of your money, is going to have to beat that.

If a government wants to borrow money, it’s going to have to offer more than 5.25%. If a company wants to borrow money, it’s going to have to offer more than the government is offering. And if a company wants to keep its shareholders, it needs to be able to offer them at least the chance of making a lot more than 5.25%.

Cash sets the hurdle. Everything else then has to jump over it.

Of course, it’s tempting to believe that today’s investment circumstances are unique. “This time it’s different!”. Inflation is high. Government debt levels have risen. Geopolitical hotspots are flaring up in Ukraine, the Middle East and Taiwan. Add to that the transformational developments in AI and the increasing impact of climate change.

But is it really different this time? The second thing to remember is that this is not new territory. We’ve been here before.

Take a look at the below chart. Between 1993 and 2007, interest rates averaged 5.35%, basically where we are today. Government debt levels were rising sharply. Geopolitical hotspots were flaring up in Yugoslavia, the Middle East and Russia. The internet was revolutionising society.

In the face of all that, surely just staying in cash, at 5.25%, was best?

Absolutely not.

Over that time, the FTSE 100 had an annual return of 8.1%. Cash set the bar at 5.35%. Equities jumped over it.

Source: 7IM/Factset

The content contained in this post has been sourced from 2 articles by 7IM on https://www.7im.co.uk/financial-adviser/news-views/7im-short-thoughts-8-november-2023 and in a blog – ‘7IM@7am: Higher rates don’t kill investing’ and shared with their permission.

Words in italics are by Robertson Baxter. 

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