Investing via the stock market is often labelled as ‘risky’. But I’m happy to take that risk rather having a lot of my wealth sitting in a cash savings account. Allow me to explain why I’m buying UK shares.
Cash savings erode in value
Let me start by clarifying that I’m not against setting some money aside. I actually reckon this is very prudent. Having cash ready for replacing something that’s broken down in the house, for example, can take a lot of the sting out when it (inevitably) happens.Â
Once I’ve reached a certain amount however, the benefits that come from keeping my wealth in this asset diminish massively. The reason for this is that inflation — the ‘silent killer’ of the financial world — gradually (or not so gradually) erodes the value of money.
Inflation isn’t always a bad thing. However, anyone with an eye on the headlines can’t have failed to notice the rising cost of living in recent months. In fact, inflation sat at 5.4% in December, far above the Bank of England’s 2% target. The state of affairs is even worse across the pond. At 7.5%, inflation in the US is now at its highest rate since 1982.Â
Since any cash savings I have are now being impacted, I think it’s wise for me to keep less money in the bank and more in the stock market. There are a few reasons for this.
Why I’d buy UK shares instead
First, equities have been shown to generate higher returns than all other traditional asset classes over the long term. So even though inflation may have the upper hand right now, this is unlikely to matter if I can lock my money away in the market for years (and ideally decades). True, past performance is no guide to the future, but nor is it completely redundant, in my opinion.Â
A second reason relates to the valuation of stocks. Whether we attribute this to the pandemic, Brexit, supply chain issues and/or tensions between Russia and Ukraine, many UK shares are very reasonably priced at the moment. As Warren Buffett would attest, the best time to buy is when brilliant companies are on sale.
Third, owning UK shares gives me access to a source of passive income in the form of dividends. Yes, not every company returns a proportion of profits to shareholders. However, those that do can serve as a defence against rising prices.
Get personal
Of course, the above is conditional on me having already built up the aforementioned cash buffer. I’d also not want to be carrying any debt (aside from a mortgage). Yes, inflation is high, but the interest I’d be paying on credit cards is even worse.
It’s also worth bearing in mind that the specific UK shares (or funds) I buy will be dependent on a number of other factors that vary between investors. As someone in his early 40s, my portfolio may not have the same asset mix as someone in their early 20s, or a retiree.
Investing is very personal. Therefore, it’s vital to evaluate my own risk tolerance, financial goals and time horizon before I buy anything with the cash I move over from my savings account.