As financial planners, we are often asked for our opinion about many assets and whether they are a viable investment option. Recently the asset class most en-vouge is cash savings accounts.
Given Interest rates have risen sharply since early 2022 is cash now a good long-term investment? Our answer is normally no and here’s why.
Long-term thinking
Being a successful investor requires long-term thinking and patience; the latter is often tested when markets dip. When this happens, cash interest rates may seem more attractive but, historically, in the long-term, other assets have beaten cash hands down. See below:
| Asset | Average annual return (20 years 1994 – 2023) |
| Cash | 2.68% |
| Inflation | 2.94% |
| Global Bonds | 5.44% |
| Global Equities | 7.36% |
Source: Dimensional Fund Advisors Ltd 1/6/1994 to 31/10/2023. Cash – UK One-Month Treasury Bills; Inflation – United Kingdom Retail Price Index; Global Bonds – Bloomberg Global Aggregate Bond Index; Global Equities – MSCI All Country World IMI Index
Eroded by inflation
It is also worth remembering that cash is not risk free and with the rising cost of living, the real value of cash may be reducing, As shown below, the rate of inflation (as measured below but the UK Retail Price Index) is slightly higher than cash returns (UK one-month Treasury Bills) over the last 20 years. This means that, whilst the value of cash savings increased, the purchasing power of the money was reduced.
For completeness, the blue line represents global equities, as measured in this example by the MSCI. All Country World IMI Index (net div.,GBP) and the green line measures the price of global bonds (Bloomberg Global Aggregate Bond Index). As you can see, both global equities and bonds have exceeded cash (and inflation) but have been more volatile along the way.
Switching into cash rarely works
Panicking, selling investments and leaving the proceeds in cash rarely pays off. Indeed historically, the best and worst performing days in the market often cluster together and, missing the best days can have a detrimental effect in the long-term (see below).
This chart shows the growth of £100,000 invested in the global stock market. If the 10 ‘best trading days’ (i.e the days with the highest return) are missed, it would’ve had a significant impact of the final value.
…but a healthy cash balance is a must!
Cash savings are a vital part of a robust portfolio. How much cash should be retained depends entirely on individual circumstances, but a good starting point is six months’ worth of expenditure plus any planned, lump sum expenditure for the next 3 years set aside in easy access cash accounts.
Investment risk information
Please note, the value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
This information is for general information only and does not constitute advice. The information is aimed at retail clients only.
Past performance is not necessarily a guide to future performance