I believe investing in UK shares is the best way to build long-term wealth, and cash should come with a health warning. So I was interested to see that the Financial Conduct Authority takes a similar view.
The City regulator has just warned that Britons are leaving too much money in cash, and are missing out on the potentially higher returns from equities. This problem has grown in the pandemic. Millions have saved more during lockdown, then let the money idle in the bank getting next to nothing. I think it’s time to take a look at UK shares instead, as there are some great opportunities right now.
Everybody needs some cash to protect against emergencies such as sickness or redundancy. As a general rule, hold six to nine months worth of spending money in an easy access account. Thereafter, your longer-term wealth should go into more rewarding investments, and I would put UK shares at the top of the list.
Cash is no longer king
Many people underestimate the destructive power of cash, because they do not know how much (or rather, little) interest they are getting. Cash ISA savers hold an incredible £270bn but more than four in 10 have no idea what they get, according to research from wealth manager Quilter. That is £115bn earning an unknown rate. It’s a waste.
The problem is getting worse as we stash more money away. Bank of England data shows we saved another £12.3bn in cash in October, despite today’s historically low interest rates. Much of this will no doubt go into easy access accounts, where the average return is just 0.08%, while the big high street banks pay a meagre 0.01%. If you are shocked by that, it’s time to investigate UK shares.
Investing in the stock market is riskier than leaving money in the bank, but only in the short term. In the longer run, cash does much more damage to your wealth. Savers struggle to beat inflation, which means its value erodes in real terms. History shows that shares easily beat inflation in the longer run, but with short-term volatility along the way.
I’m buying UK shares today
I find this addiction to cash particularly frustrating because I think now is a great time to buy UK shares. Stock markets have rallied from the lows in March, but the recovery still has a long way to run. I’m going shopping for shares today, ahead of any Santa rally.
2021 could be a great year for UK shares, as Covid vaccines do their work and (hopefully) Brexit fears ease. I’m anticipating capital growth when stock markets recover, combined with rising income from dividends.
While many FTSE 100 companies have cut their dividends this year, plenty still yield between 5% and 10%, easily outpacing the return on cash. That’s another reason for me to buy UK shares today.