For the 14 years from 2009 to 2022, the Bank of England’s base rate of interest averaged around 1%.
That resulted in ultra-low interest on regular savings accounts. So, investing in the stock market was a no-brainer to me.
But in the past year, the Bank of England has raised its interest rate sharply to 5%. In an attempt to tackle stubbornly high inflation, there could be more hikes to come.
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So, what does this mean for stock market investments? Is it still worth it?
Let’s take a look.
Under pressure
Higher interest rates may likely tip the UK economy into recession. The Office for National Statistics recently reported that around half of adults in Britain have seen rises in their rent or mortgage payments in the past six months.
This squeeze on household finances could put pressure on the economy and could result in less money flowing towards the goods and services that British companies sell.
Despite this and possibly surprisingly, there are reasons to be optimistic about stock market investments.
Not all parts of the world are facing such economic challenges. And over 80% of FTSE 100 sales are from overseas markets.
So by diversifying stock investments across several regions, I can avoid the risk of one market performing poorly.
Long-term stock market gains
Ultimately, stocks allow investors to share the rewards (and failures) of a business. Throughout history, we’ve seen many companies thrive. And in the long term, the stock market has historically outperformed many other types of investment.
On average, stock market returns are typically around 8%-10% a year. That’s despite several recessions and global conflicts.
Stocks are also relatively liquid, which means they can be easily sold in case I need to access the money. In contrast, property investments can take time and money to sell.
ISA first
To incentivise saving, the government offer several tax benefits for investing in a Stocks and Shares ISA. There are limits on how much investors can add every year, but it’s certainly the first investment vehicle I head to.
Bear in mind that even a diversified pot of shares can face challenges though. Although long-term results could be appealing, the stock market can be bumpy.
In fact, history shows there are likely to be some periods of poor performance. Trying to predict short-term stock market gyrations is notoriously unreliable.
That’s why I’d focus on the long term.
Looking to the future
Looking ahead, many companies are likely to continue operating thriving businesses, in my opinion.
For instance, tech giant Apple will probably produce a lot more consumer technology. And pharmaceutical giant Astrazeneca will likely continue to discover and produce medicine for years to come.
The recent wave of artificial intelligence technology could create new companies to invest in. Or it could make existing businesses more efficient than ever before.
Among the many winners, there will be some losers too. But by owning a diversified selection of quality stocks over a long period, I’d expect stock market investing to be totally worth it.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
