Currently, some cash savings accounts are offering in excess of 5% AER variable (see https://www.money.co.uk/savings-accounts/instant-access-savings/results) and it’s fair to say that many investors in the stock market may struggle to achieve such gains in the short term.
However, does this mean that those of us with exposure to the stock markets should sell all our investments and put them all into cash?
Let’s give it some context…
In the early noughties, the Bank of England (BOE) base rate was relatively high, often exceeding 5%. Moving on through the decade, the bank rate continued to rise, reaching levels of around 5.75%.
However, in 2007/8, in response to the Global Financial Crisis the BOE lowered its base rate significantly and by early 2009, it had reached historic lows, dropping to just 0.5%.
From 2010 through to 2022, the BOE kept the base rate very low, often hovering around 0.50% or lower still. It briefly increased to 0.75% but generally stayed at these historically low levels.
In March 2022, we started to see the BOE increasing rates rapidly, ending up where they are now at 5.25%.
So, what does this mean for savers?
It partly depends on how you view interest rates and whether these are likely to remain high. Likewise, it will depend on what risk you are both prepared and able to take.
Over the long term, the stock market has consistently outperformed cash savings. However, there have been plenty of times, possibly like now, when cash savings have provided a better return.
Take for example the FTSE All Share which encompasses the FTSE 100, the FTSE 250 and the FTSE Small Cap. Over the last 20 years, with dividends reinvested, this has grown by over 336% in the last 20 years1. As an example, this would have turned an initial investment of £10,000 into over £43,600.
By comparison, if you’d put that same amount in a savings account at a rate of interest of 3.2%2 for 20 years and never made any withdrawals, you would have turned £10,000 into £18,775.
The key thing to note here is that in the same way that there is no certainty over consistently high cash savings account interest, there’s also no certainty over stock market performance.
It’s less about timing the market and more about time in the market.
You need to have enough time to withstand the ups and downs of the markets and the ability to suffer the losses which are the inevitable trade-off for the potential gains.
1 Source: Lipper IM to 31/12/2022.
2 There were times in the last 20 years when you could have got a better return from high interest cash savings accounts, but also times when you would have got considerably less. The illustration of growth of cash savings is taken from Santander’s savings calculator – see https://www.santander.co.uk/personal/savings-and-investments/savings-and-investments-calculator.
Past performance is no guarantee of future results. This is not a personal recommendation to invest in this or any other investment. Whether or not an investment is suitable, depends on your individual circumstances.