It’s one of the most basic principles of investing. Whether I’m buying FTSE 100 stocks, commodities, bonds, or indeed investing in any asset class, the more risk I take on, the higher return I should expect to make.
Savings accounts are becoming increasingly popular today as rising interest rates push the returns on these low-risk products higher. People are essentially seeking the best of both worlds by getting a solid return without putting their capital in danger.
But research by Quilter Cheviot shows that stocks can still beat cash, and especially so in this period of high inflation.
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Investment manager David Henry notes that “equities mostly outperform cash over sensible time frames, usually regardless of where interest rates sit”.
Stocks stomp on cash
Quilter analysed the annual return generated by the global stocks versus cash going all the way back to 1984. It used the MSCI World Index to gauge stock market performance over the period, and a moving average of the Bank of England base rate to calculate the cash return.
It found that:
- Over rolling five-year periods, global stocks have provided better returns than cash 74.2% of the time.
- During rolling 10-year periods, stocks have outperformed cash 85.5% of the time.
- Over rolling 15-year periods, shares have beaten cash 91.3% of the time (aside from short periods following the ‘dot com crash’ and during the 2007-2008 financial crisis).
Inflationary issues
Putting money away in a savings account is a particular issue in this period of high inflation. Interest rates are largely far better than they’ve been since the late 2000s and, of course, cash savings account returns are guaranteed. Yet due to elevated levels of inflation, savers continue to make a negative return on their hard-earned money.
Henry adds: “By keeping cash in the bank today you are accepting a historically high erosion of your purchasing power”.
A quick glance at Moneysupermarket’s illustrates the scale of this disparity. The price comparson site says the best-paying, no-notice Cash ISA on the market (from Aldermore Bank) pays an interest rate of just 3.85%. That remains way below the rate of consumer price inflation in the UK (8.7% in April, according to latest figures).
Why stocks could be better
Henry goes on to say that “although stocks are often an imperfect inflation hedge in the short term… over the long term they are one of the best inflation-hedges we have”. This is because companies can raise the prices of their goods and services to offset higher costs.
This is why I continue to prioritise investment in stocks over cash. FTSE 100 shares have provided an average annual return of 7.48% between 1984 and 2022, according to IG Group. This is below inflation, but remains better than the returns cash products still offer.
The good news too is that many top UK shares have fallen in value as investors have switched into safe-haven assets like cash. So I can pick up many top blue-chip shares that are effectively ‘on sale.’
Stock markets go up as well as down, and there’s no guarantee I’ll make money by buying equities. But with the right long-term investing strategy, I’m confident I can make returns far above those of other asset classes. And especially cash accounts.
