With Bank of England base rate at a 15-year high of 5%, you can now just about earn 4% on easy access savings and 5%+ in 12-month or longer fixed term accounts.
With rates like these on cash, is there any point investing?
Quick answer, Yes! I explain more in this short video.
Quick reason 1) Inflation.
Quick reason 2) Shares in the world’s most profitable companies have always outperformed cash over the medium to long-term.
Quick reason 3) Tax.
Quick reason 4) Diversification.
For a transcript of the video, keep reading:
Hi everyone, today I’m going to tell you a story about a meeting I had with a client last week. Let’s call him Bob. I met Bob on Thursday last week and Bob asked me a very good question you can see on the screen in front of you. “If I can earn 5% on cash, why bother investing?” Now, I actually did this video the first time around on a Friday last week. So here’s me on Friday last week, you can see the date top right-hand corner and the reason I’m showing you this is because I stumbled across this article at the time, which was almost word for word, what I was talking about.
Now just to prove I’ve done all of that, just to prove that we do have some original ideas here. And I haven’t just stolen them all from Saturday’s Times. But this is obviously a very good, topical issue. So let me tell you what I told Bob about his question. Why should I bother investing if I can get 5% in cash? Now, you’re always going to need some cash. If the roof blows off your house, you don’t know what’s going to happen tomorrow, some idiot steals your car, you’re always going to need some cash. And there’s some questions that we can’t answer entirely with a spreadsheet or with some with some nice pretty pictures and some charts. But this is what I explained to Bob and we’re going to show you some charts we’re going to get progressively further back in time to show you that medium to long term wealth is created and maintained by holding what’s called Real Assets and that is really shares in the great profitable companies of the world and property.
And by property, I mean not the house you live in, another property that you own but that’s a video for another day. But let’s stick to the markets. And this is what I explained to Bob. So here we’ve got the last six months. The stock market is the blue line, 80% of the stock market and 60% the stock market and the other jagged lines below that and the cash line, fairly straight line, bottom of that. So in the last six months, you’ve been able to do maybe 2% in cash. Now I know now you can get 5% but to do so you’ve got to tie money up and it’d be inaccessible for at least six if not 12 months. Instant Access you might just be able to get 4% If you shop around, but in the last six months that’s what the markets have done. Cash has not done as well.
Go back 12 months, the gap widens. The market stock market, the great profitable companies in the world are up 12% and when you might have done 2 or 3% in cash.
We go back three years and the picture starts to get even more stark here. The great profitable companies in the world have now delivered 33% return and something significant happened just over three years ago. So let’s go back four years and you can see March 2020 the drop in the markets due to COVID. But even since then, the markets are up 40%. Think of everything that’s happened in the last four years; a war in Europe, inflation, cost of living crisis, four Prime Ministers and a pretty shambolic political situation. Yet the great companies in the world have delivered returns of 40%, far outstripping that of cash.
Let’s go back a lot further, 24 years nearly this time I’ve got inflation and cash on here versus the global stock market. And the global stock market’s done nearly 400% return. It far outstrips what cash and what inflation have delivered in that time.
The picture is even more stark if I go back to the late 80s. So we’ve got 35 years of data here. The great profitable companies of the world have delivered 1,700 odd percent return versus around 170% for inflation.
But I think the most telling picture here is this one that also includes COVID. Can you imagine that with everything that’s happened in the last four years, and the stock markets have still delivered a 40% return?
This is my main message, we don’t have a laboratory experiment here, I don’t know what’s going to happen tomorrow, nobody does. If anybody does tell you that they know what’s going to happen tomorrow to run away, they clearly don’t. But you need faith in in the markets and faith in human progress, patience that over the medium to long term that the markets are going to deliver for you. They always have in the past. I know you can get 4 or 5% on cash now, and that gives people a lot of certainty. So by all means hold so in cash, but the majority of your assets need to still be invested. That was my main message to Bob and, broad brush, that is my main message to you all as well.