It’s 10 years since the start of the global financial crisis, which has seen savings rates plummet but is that a reason to abandon cash and pile everything into the stock market?
In short no. Cash is an integral part of building any investment portfolio. It’s the only asset class that does not pose any capital risk – meaning that you won’t lose any actual money by placing your money in ‘cash’.
Therefore, it was disappointing to see figures released by Fidelity Investments last week, extolling the virtues of investing into the stock market over the last 10 years, while using ‘average’ cash rates to illustrate how poor cash has been.
We are all aware that interest rates on cash are challenging at the moment with many global stock markets at all-time highs, but it is not as simple as cash is poor and the stock market is good.
And we’re not suggesting that everyone needs to keep all their funds in cash – we’re not financial advisers for a start, but we do know that there is no need to settle for average – or in many cases less than average cash savings accounts, far better rates can be found by staying active.
Last year, freelance financial journalist Paul Lewis carried out some research that showed that money in best buy savings accounts would have produced a higher return than a FTSE 100 shares tracker, over the majority of investment periods from 1995 to 2016.
The research compared returns from a FTSE 100 tracker fund – which, as the name suggests, tracks the FTSE 100 index of the UK’s biggest 100 companies, with cash that is moved each year into the best one-year fixed rate bond with a bank or building society.
The tracker has dividends reinvested and the cash is reinvested each year along with the interest earned.
It found that this Active Cash™ beat the total returns on the tracker in 57% of the 192 five-year periods covered, whilst the tracker won in 43% of periods.
But, according to Fidelity, if you had deposited £5,000 per year into cash over the last 10 years, your £50,000 total deposit would have grown to £50,619 – an overall return of just 1.20%.
We beg to differ.
If you had chosen the best one year fixed rate bond each year over the same term, your £50,000 would have grown to nearly £58,500* a return of almost 17%, with total security of the underlying deposit and all interest earned.
And if you deposited a lump sum of £10,000 into the best one year fixed rate bond and switched the initial deposit plus interest, over the last 10 years, you’d have over £14,000** – a return of over 41.5%.
Of course, things have changed and over the last 10 years rates have dropped considerably, but with interest rates on some high street savings accounts paying as little as 0.01%, it’s time to vote with your feet and not accept these appalling rates.
The best easy access accounts are paying up to 1.25% gross/AER. On £10,000 this means earning £125 over 12 months, as opposed to just £1.
And if you can tie the money up, it could make even more. Interest rates on fixed rate bond have been rising steadily this year. 1 year bonds are up 39% so far in 2017 and the best rate available now is 1.95% with Atom Bank.
So it just goes to show, cash shouldn’t be bashed, savers need to shop around for the best rates to make their savings work as hard as possible and the value of seeking independent advice to maximise return.
An Insiders Guide to Wealth Management
Navigating the best and most appropriate vehicles for your wealth can present a minefield of different options, interest rates, returns and timescales. The right financial advice can help to eliminate these problems by guiding you away from the unsuitable to create a solution and/or portfolio tailored to your objectives.
To help you, Savings Champion has produced this guide to highlight some key factors to consider when deciding to review or appoint a Wealth Manager, including eight essential questions to ask to ensure you end up with the right adviser for you, your family and your financial future.
> Or if you'd prefer to speak to one of our Savings Experts please call on 0800 011 9705
*£5,000 pa plus gross compounding interest deposited into the best buy one year bond each year from July 2007 = £58,415.85 (16.83%).
** £10,000 lump sum, plus compounding interest deposited into the best buy one year bond each year from July 2007 = £14,169.46 (41.69%).