Why Invest Money on the Stock Market?

With cash earning 5%, why invest money on the stock market?

Cash savers are benefiting from the highest returns in almost two decades, with some accounts paying over 5%. The rise in returns has been rapid, with rates today considerably higher than a year ago. Unsurprisingly savers are committing more to cash savings now than at any point in the past five years*.

After a long spell during which returns on cash were virtually zero, investors are now reconsidering what role cash deposits should play in portfolios overall.

Are investors right to reconsider cash?

All savers’ circumstances are different, and some may have excellent reasons to hold cash. But just because savings rates are rising does not mean that cash is keeping pace with inflation.

Popular UK Savings Rates vs Inflation

Source: *Bank of England; **Moneyfacts, June 2023; ONS

As shown, cash returns after inflation – or ‘real’ returns – remain negative, even though rates have risen strongly. Negative returns mean losses. And the jump in inflation since early 2022 means that the value of cash is now eroding at a faster pace than for most of the previous decade, even if the cash earns today’s top available rates.

So for many the key question of where to make long-term investments remains as relevant as ever. In fact it is even more important.

Cash or stocks and shares: what are the chances of beating inflation?

The certainty offered by cash lies only in its nominal value. £100 today will still be £100 in future years. However, there is no certainty its spending power will hold up. Low inflation will see the money retain its spending power to some degree, but high inflation will erode it quickly.

Time is the critical factor. Over short periods cash is likely to fare better against inflation. Over long periods, cash fares worse, even where inflation is relatively low.

The chart below crunches historic returns on cash and stock market investments over a range of time periods extracted from 96 years’ of data. It then sets these against inflation over the same periods of time.

The results are stark. The chart shows that over very short periods – three months or less – there has not been much difference in the likelihood of cash or shares beating inflation. But for longer periods the gap widens conclusively.

  • The likelihood of cash savings beating inflation has been about 60:40 for the majority of all timeframes.
  • The likelihood of stock market investments beating inflation has reached 100% where the investments are held for 20 years.

In other words, for every 20-year timeframe in the past 96 years, stocks and shares have delivered inflation-beating returns.

So, while stock market investments may be risky in the short term, when compared against inflation they have offered far more certainty in the long term.

The stock market has delivered strong long-term returns through very different conditions

The recent era of ultra-low interest rates, from which we are now emerging, has meant that cash has been unattractive for investors. That is even though inflation until recently has been low.

In the past 5, 10 and 20 years, cash savings have failed to keep up with price rises and so investors would be worse off.

Over very long periods – during which inflation and interest rates have gone through both highs and lows – cash has retained its spending power, but only just.

By contrast, stock market investments have delivered inflation-beating returns over all periods during the last 100 years.

So stock market investments are a better bet for long-term real returns?

There are lots of reasons to hold cash, and savers’ individual goals and circumstances will differ. Cash can complement your overall portfolio, and we would always recommend our clients hold a certain level of cash to act as a ‘rainy day’ pot.  But for many, finding that right balance of what to keep in cash and what to invest to get the best outcomes all round is where financial advice can be invaluable.

The question of ‘should I invest in cash?’ is not straightforward, and for the longer-term saver all the data points to investing being the best option. 

Different risks are attached to both cash and stocks and shares. Cash is far from a risk-free asset: even at today’s best available savings rates, deposits are likely to lose real value. And, as our data shows, cash can deliver real losses over longer periods too, including the past two decades. But shares also carry risk, especially when held for shorter periods.

While long-term historic data strongly suggests stock market investments stand a better chance of beating inflation than other investments, investors need to understand that they will take you on a bumpier journey along the way. We know that trust and peace of mind are two key factors our clients look for when receiving financial advice, and we are very aware that particularly in times of uncertainty you will need ongoing support from us, whilst we continue to monitor your investments to ensure they are in the right place to meet your long-term goals.

In conclusion, holding cash is not a bad thing, particularly whilst rates are attractive now. It makes sense to take advantage of them, but finding the right balance is key. Committing everything to cash needs careful consideration as the data suggests that over the long term you will end up worse off.

We are here to help you strike that right balance and our priority is to ensure that you have a sound financial plan that puts you on track to achieve your long term financial aspirations. It is likely that this will involve investing in the main, whilst also retaining yourself a sufficient cash pot to fall back on which in turn allows your investments to deliver long term success.

Your adviser is available for you to speak to whenever you need them outside of your regular review meetings. Please don’t hesitate to get in touch with Antony, Gillian, Dan, or John and they will be happy to talk things through with you.

*Source: Bank of England, two-year fixed rate cash ISA, change from 30 April 2022 (1.19%) to 30 April 2023 (4.12%). ISA deposits from BoE Money & Credit tables. Data issued June 2023.


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