When investing for the long term, UK shares will give you a far better return than cash ever will. If you don’t believe me, here are some figures to prove it.
Since 1925, cash has delivered an average annual return of 4.9%. That looks unimaginably high today, when savers are lucky to get 0.5%, but it trails every other major asset class. Global funds grew 6.6% over the same period, while rental property climbed 7.2% and gold 7.7%. UK shares were easily the best performers, growing at an average 12.5% a year over the 95-year period.
These figures, from Global Financial Data, show that UK shares do not just beat all rival investments. They thrash them. This outperformance is likely to widen rather than narrow, as cash has been hovering close to zero for more than a decade.
Here’s why I’d ignore the Cash ISA
Right now, the average easy access Cash ISA pays around 0.35%. With inflation jumping to 1%, the value of your money is falling in real terms. Despite this, tens of millions of Britons continue to let their hard-earned money die a slow death in cash, earning next to no interest.
It is fine to hold small sums in cash for emergencies, but you do not want to leave your long-term savings there. When saving for a distant goal such as retirement, you should make full use of your Stocks and Shares ISA instead. While UK shares are more volatile than a Cash ISA, history shows they deliver a far superior return over the longer run.
In return, you have to accept that stock markets are more volatile. UK shares bob up and down from day to day. We have had one stock market crash this year, and may see another.
The global economy will take time to recover from Covid-19. However, current uncertainty makes today a good time to buy UK shares. The FTSE 100 is down almost a quarter since the pandemic struck, which means you can buy top stocks at a major discount.
Plenty of UK shares to choose from
I would choose my targets carefully. Look for companies that have shown resilience in the current crisis. I would prioritise those that have not called on government furlough schemes and other support, especially if they have stood by their dividends too. Target those that are still generating healthy revenues, and have debts under control.
Companies like these will have the strength to muddle through the crisis, then take off once we are out the other side. Better still, many UK shares offer dividends of 6% or 7%. You will not get that return on cash in the foreseeable future.
You should hold UK shares for a minimum of five years, and ideally much longer than that. That way you can forget about the stock market crash, and the next one. Over time, your portfolio picks should generate enough wealth to help you get rich and retire early.
