We have had several separate conversations with clients over the last few months relating to the same topic. The question was simple – “should I sell my investment and just go into cash?”

Cash savers are benefiting from the highest returns in almost two decades, with many popular fixed-rate cash accounts paying over 5%. The rise in returns has been rapid, with rates today more than double those of a year ago, as shown in the graph below.

Source: Bank of England (2023)

Unsurprisingly savers have committed record sums to cash accounts in recent month. After all, 5% on cash over the year (before tax) looks more attractive than a declining stock market, right?

Not necessarily!!

All savers’ circumstances are different, and some may have good reasons to be holding cash, but just because savings rates are rising does not mean cash is the best solution for you.

Returns on cash after inflation, also known as “real returns”, remain negative, even though interest rates have risen strongly. Negative returns mean losses!

The jump in inflation since early 2022 means that the value of cash is now eroding at a faster pace than for most of the previous decade, even if the cash earns today’s top available rates.

High inflation in the UK means that the cost of goods and services are raising higher than the Bank of England’s target rate of 2%. One risk of higher inflation is that it has a regressive effect on lower-income families and older people and if people can’t afford to eat and stay warm due to raising costs, the consequences are dire!

So what do the Bank of England do?? The standard response is to raise official interest rates as higher rates reduce aggregate demand, leading to a slower rate of economic growth, which is exactly what we have seen - 14 TIMES since the start of 2022!

However, time is a critical factor when deciding on a suitable investment solution. Over short periods cash is likely to fare better against inflation, especially when interest rates are high, but over long periods cash fares worse, even where inflation is relatively low.

The chart below crunches historic returns on cash and stock market investments over a range of time frames extracted from 96 years’ data. It then sets these against inflation over the same time frames.

Source: Schroders (2023)

The results speak for themselves! The chart shows that over very short periods (3 months or less) there has not been much difference in the likelihood of cash or shares beating inflation, but for longer periods the gap between the two widens considerably.

The likelihood of stock market investments beating inflation, where the investments are held for 20 years, is 100% while the likelihood of cash beating inflation over the same period is only 66%. So while stock market investments may be riskier in the short run, when viewed against inflation they have offered far more certainty in the long run.

This is also supported by the below chart which shows that in the last five, ten and 20 years, cash savings have failed to keep up with price rises and so depositors have been worse off.

Source: Schroders (2023)

Over very long periods (during which inflation and interest rates have gone through both highs and lows) cash has retained its spending power, but only just. By contrast, stock market investments have delivered inflation-beating returns over all periods highlighted in the chart.

The cash debate is a perfect example of where we, as your advisers, can deliver value to you. The question of ‘should I invest in cash?’ is not straightforward, and for the longer-term saver all the data points to stock market investing being the best option for many.

In the next couple of months, it is likely that the current high interest rates will reduce. The good news is that this actually plays right into our clients’ hands……………

The minute Central Banks reduce, or even stop putting up rates, we expect a surge in many asset prices, especially those lower risk asset classes such as corporate and government bonds. You only have to look back at historical data to see how powerful and rapid the market rallies can be.

This offers a very exciting opportunity for growth and gains for our clients.

We just need to get off the treadmill and start moving forward. It’s simply a matter of time.

We understand that this is a worrying time for our clients and this has been a very long period of difficult market conditions. If you have any queries or concerns, please do not hesitate to contact us.