With accounts offering interest rates as high as 5.22%, it can be tempting to stash any cash I have into savings right now. However, I reckon this would be a serious mistake if I harboured a dream of retiring early. Buying cheap shares is still a priority for me, and here’s why.
Savings beat inflation…
To be clear, I’m not suggesting that cash savings are a bad idea. An unpredictable world makes it essential to have some kind of buffer for life’s little emergencies.
This would be the case even if inflation were still stuck in double digits as it was only a few months ago. Yes, my money would be losing value but I’d still consider this a worthy sacrifice for the peace of mind it brings.
Fortunately, October’s inflation reading came in at 4.6%. That’s a significant drop compared to just one month before (6.7%). So things are going in the right direction, even though there’s no guarantee this will remain the case.
As stated earlier, the great news is that there are now savings accounts that offer over this amount. Consequently, I’ve been moving my ’emergency fund’ around to get the most bang for my buck.
…but cheap shares beat cash!
In spite of all this, I still can’t be put off buying stocks for two reasons.
First, research consistently shows that shares outperform cash in the long run.
I think that last bit is vital to understand when it comes to investing for retirement. As a rough rule of thumb, any period under five years is not sufficiently long enough for stocks to show their worth. Even if they did, we can’t be sure about how ‘good’ the outcome will be.
That said, buying in times of economic trouble should put the odds of a positive result in my favour.
Bargains galore
This brings me to my second reason. Many quality companies are currently trading on relatively cheap valuations. So unless investors believe that the UK will never see a bull market again (I don’t), now could be a wonderful time to go shopping.
Of course, there are different ways of going about this. Some investors are happy to get the market return via cheap index trackers. Others are willing to put their trust in fund managers to outperform, albeit at a higher cost. Others pick stocks in an effort to hit their financial goals sooner.
Personally, I use a mix of all three strategies and, right now, my wishlist is bulging. Premium spirit seller Diageo‘s share price recently suffered its biggest share price decline in 25 years due to weaker trading. Elsewhere, luxury business Burberry recently set a new 52-week low, again due to a (surely inevitable) slowdown in sales.
Are these established companies doomed? If we believe that human nature’s desire to feel good and display status hasn’t changed, the immediate answer is, of course not!.
And that makes me a potential buyer.
More risk, more reward
The specifics of retirement will vary from person to person. Switching off completely isn’t for me. But having the freedom to do what I want definitely is.
Achieving that goal will involve sacrifice and patience. It will also involve taking on short-term risks that don’t exist with cash savings accounts.
They’re risks I’m comfortable taking.
