I’ve shunned cash savings accounts for the last decade and invested most of my money in FTSE 100 shares and some international funds. The decision felt like a no-brainer, given the low returns on cash, despite its greater safety. Does it still make sense now that savings rates are finally rising?
The nightmare for savers began in March 2009, when the Bank of England slashed base rates to 0.5% after the financial crisis. Yet as the BoE hikes base rates to combat inflation, savings rates are starting to improve.
This time last year, the average one-year savings bond paid just 0.6% a year, Moneyfacts says. Today, the average is 1.97%, while the best buy one-year fixed rate bond from United Trust Bank gives savers 3.35%.
I reckon FTSE 100 shares still beat cash
While these savings rates remain low by historical standards, they’re heading in the right direction. This is welcome news for those who don’t want to take a chance on the stock market, but it doesn’t change my strategy.
I still believe the best way to save for my retirement is through the stock market and in particular, the FTSE 100. While investors must endure ups and downs in the shorter run, over the longer term, total shareholder returns tend to be much higher.
While savings accounts only pay interest, FTSE 100 shares will reward me in two ways. First, I benefit from capital growth if and when share prices rise. Second, I’ll get a regular income stream from dividend payments.
Right now, FTSE 100 blue-chip shares yield 3.53% on average, just ahead of the best fixed rate savings bond. Through careful stock-picking, I can generate far more income than that. For example, fund manager abrdn yields 9.26% a year, Barratt Developments yields 8.74% and Sainsbury’s yields 6.24%. No savings account can match those. I can’t imagine a time when one will.
I reinvest all the dividend income I receive straight back into my portfolio. That way I pick up more stock that will pay me more dividends so my equity stake grows over time.
The FTSE 100 is down 3.75% year to date, so I’m running a slight capital loss right now. That doesn’t worry me, because my investment timeframe is 20 to 30 years. That gives me the time I need for the index to recover and reinvested dividends to roll up in value.
I reckon that this year’s volatility makes it an even better time to invest in the FTSE 100. Shares on the index look cheap, trading at just 14.01 times earnings. Some individual stocks are on sale at bargain basement prices. For example, mining giant Anglo American trades at 4.5 times earnings, as does high street bank Barclays. Insurer Aviva trades at just 7.7 times earnings.
These low valuations should offer me some protection in case markets fall further, reducing some of the risk in these volatile times.
I’d leave the equivalent of six months’ spending money in an easy access cash account, for emergencies. But I believe my long-term savings will continue to work much harder invested in FTSE 100 shares.