UK shares have outpaced cash for years. With the average easy access account now paying just 0.12%, I can’t see that changing for many more years.
If I had put £10,000 in cash in December 1999, I would have £17,050 today, according to the Association of Investment Companies. Invested in the average stocks and shares investment trust, I would have a meaty £57,550.
Despite this, Briton’s cleave to the comfort of cash cash. Incredibly, 55% of us plan to leave the money we have saved during lockdown in cash, according to research from the Wesleyan. Just 14% of us would invest it in UK shares.
I’d forget the Cash ISA
Everybody needs some cash, ideally in an instant access account where they can get their hands on it in a hurry. This should be enough to cover six to nine months of essential spending, in case of emergencies.
I wouldn’t leave my long-term savings in cash, though, because the value will be steadily eroded by inflation. That’s painful enough today, when consumer prices are rising by just 0.7% a year, but will really hurt if inflation accelerates, as many suspect it will soon.
UK shares are far more volatile than cash. We saw that during the first lockdown last March, when the FTSE 100 lost a third of its value in weeks. However, history shows that shares recover strongly, given time. Over the last 12 months, the FTSE 100 is up 28%, with dividends on top.
That is because governments and central bankers pumped the market full of stimulus, fuelling a rapid recovery. The recovery has slowed lately, as the pandemic proves hard to shrug off. We can expect more volatility in the months ahead. But I’m investing for 10 years or more, and that should protect me against short-term setbacks.
Savings rates are getting worse rather than better. Best buy rates have at least halved in the last 12 months, according to research by Andrew Hagger at MoneyComms.co.uk.
I’d rather buy UK shares instead
£20,000 in the best buy instant access savings account would have earned £262 in March 2020, Hagger says, which isn’t great. But it’s way better than today’s miserly £100.
He says the future continues to look bleak for savers: “The spending power of people’s savings could be reduced further during 2021 with inflation expected to rise as petrol prices surge and additional post-Brexit costs for importers are passed on to consumers.”
I have my rainy day cash (in the shape of an offset mortgage). My long-term savings will go into UK shares. If our vaccination programme continues to work wonders, the economy could fly. Treasury surveys suggest GDP will grow 4.4% this year, and 5.7% next year.
UK shares are ripe for a recovery, provided inflation and mutant Covid-19 variants remain in check. That’s why I’d rather invest in a Stocks and Shares ISA than a Cash ISA, where money goes to die.