This will reinforce the very modest rates currently available from cash deposit accounts and is a clear reason to look again at the merits of instead investing your money in the markets.
You might think your money is safe, tucked away with the bank, and to an extent it is given the protection offered by the Financial Services Compensation Scheme, but you should not ignore the impact of inflation.
According to the latest Barclays Equity Gilt study, which is the benchmark for the returns from different asset classes, over the past ten years you would have incurred a 1.9% annual ‘real’ loss from holding cash.
This is because the historically lower rates of interest over that period have failed to keep pace with rising prices, so the spending power of cash has been eroded.
Cash might feel like a safer option, but history suggests this asset class will significantly under perform compared to equities. Over the same ten-year time frame the Barclays data shows equities have delivered a ‘real’ return of 3.2% and over every decade-long period running back to 1917, equities have out performed cash.
There has been significant volatility in stocks in the last ten years. However, stock markets often recover quickly from crashes. In hindsight 2009 was one of the greatest buying opportunities for shares in recent memory – only a year after one of the biggest ever stock market collapses.
If you have never invested before or have not invested for some time, funds are a good entry point as they provide diversified exposure to lots of underlying holdings and the investment decisions are made by an expert fund manager.
While cash is unlikely to deliver the returns required to hit your savings goals, you should always have some cash put by as an emergency buffer in case something unexpected happens in your life. It is also worth having some cash to hand in case markets fall and you can act on sudden price fall by buying equity in some great companies or funds.
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Selftrade does not provide investment advice. This article is the authors view and is not the view or opinion of Selftrade and Selftrade accepts no liability for any loss caused as a result of the use of this information. The opinions expressed are those of the author at the time of writing and should not be interpreted as investment advice.
The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance. We do not provide advice or make recommendations about investments. If you have any doubts about the suitability of an investment, you should seek advice from a suitably qualified professional adviser.