COULD moving to cash be a good idea for long-term savings at this point in time?

Following the recent hikes in interest rates, I’m aware that many investors are considering this option currently.

The short answer is that remaining invested over the long-term is beneficial…

Please allow me to explain why.

As has been well documented in the media and through Future Life Wealth Management’s own coverage, interest rates have increased in recent months.

This is all part of the Bank of England’s plan to curb inflation.

The aim is to bring inflation down to a ‘reasonable’ level and once this has been achieved, interest rates will inevitably follow.

If we look back at the decades of history of interest rates paid on cash, the reality is that interest rates are highly volatile and, in particular, interest rates in the UK have swung from 0.1% to well above 14% over time.

By comparison, let’s look at the dividend yield on UK equities...

Just so I’m absolutely clear, dividend yields are a stock's annual dividend payments to shareholders expressed as a percentage of the stock's current price.

And dividend yields on UK equities have been far more stable than cash.

From research conducted by our friends at 7IM, I’ve discovered that the lowest equity dividend yield was 2.0% and the highest was 6.9% - if you overlook the 11.7% year in 1973, of course.

Central banks cutting rates is common.

Raising interest rates - on the other hand - is an unpopular move, particularly for borrowers.

However, at a big PLC the dividend is an advert for how reliable and profitable your business is and a key sign of stability.

Cutting dividend yields is something they are keen to avoid at all costs.

You haven’t given anything up for that dividend stability either - the 123-year average of cash rates and dividend yields is identical at 4.5%.

Now, here is the key part.

With cash, the yield - in the form of interest - is your whole and entire return.

So, the 123-year annualised return is the same as the average interest rate - namely 4.5%.

But with equities, your return isn’t just the dividend yield, there is also the potential for capital growth and the 123-year annualised return for UK equities is 8.8%, approximately 50/50 split between dividends and growth.

This all adds up over time…

Time period	Equity Return (annualised %)	Cash Return (annualised %)
123 years (1899-2022)	8.8%	4.5%
50 years (1972-2022)	10.5%	6.5%
30 years (1992-2022)	7.1%	3.3%

 

Which translates to:

 

Time period	Equity Return (£100 invested)	Cash Return (£100 invested)
123 years (1899-2022)	£3,397,325	£21,887
50 years (1972-2022)	£14,548	£2,361
30 years (1992-2022)	£787	£263

 

So, whilst cash may feel ‘reliable’, over the long-term the benefits of investing clearly remain.