Why equities will always be a better bet than cash, even if interest rates rise further | Trustnet

The rise in inflation starting from the beginning of 2022 implies that the worth of money is currently deteriorating more rapidly compared to a majority of the past ten years, even though the nominal rates are higher.

Shares will consistently prove to be a more favorable choice for investors with long-term goals compared to holding onto cash, even in the scenario of ongoing interest rate hikes.

According to Duncan Lamont, the individual responsible for strategic research at Schroders,

Savings rates have tripled in one year, reaching as high as 5% on deposits that last for a year. Recent information reveals that inflation stayed at 8.7% in May, which is higher than the predicted decrease to 8.4%. This news has raised the chances of interest rates being raised even more. Predictably, individuals who save money are now putting more of their funds into cash ISAs than they have in the past five years. At the same time, advisors have noticed a significant increase in interest from long-term investors in the most easily accessible types of investments.

Lamont acknowledged that each individual saver's situation is unique, and some may have valid justifications for maintaining cash holdings. Nonetheless, he cautioned that although the rates offered on cash have significantly increased in nominal terms, the actual return after factoring in inflation remains negative.

"Losses are the result of negative returns," he clarified. "Furthermore, the significant rise in inflation since the beginning of 2022 has led to a quicker decline in the value of cash compared to most of the past decade, despite the cash earning the highest rates available at present."

The person in charge of investigating long-term plans highlighted the primary advantage of cash compared to stocks is the guarantee that its worth will remain intact – although this only applies in terms of value on paper. While £100 in the present day will continue to hold the same numerical value in the coming years, there is no assurance that its purchasing power will remain strong. Even though a low rate of inflation may help sustain the spending capacity of the money to some extent, a high rate of inflation will swiftly diminish it.

"Lamont emphasized that time plays a vital role in this matter. In the short term, cash tends to outperform inflation. However, over extended periods, cash proves to be less favorable, even in cases of moderate inflation."

Lamont examined the profits from cash and equity investments across various time spans in the previous 96 years, after which he contrasted them with the effects of inflation.

According to the findings, there is minimal disparity between the chances of cash or stocks surpassing inflation within brief time frames, such as three months or less. However, as the duration extends, the disparity becomes more evident, and once it reaches a span of 20 years, the probability of stocks outperforming inflation reaches a solid 100%.

According to Lamont, investing in the stock market might carry some risks in the near future; however, it has shown greater stability over time in comparison to inflation. Lamont also stated that equities have consistently provided substantial returns over the long haul, even in diverse economic conditions.

Additional investigation revealed that any money remaining in a savings account since 1926 – a period during which inflation and interest rates experienced fluctuations – managed to maintain its purchasing value throughout this duration, albeit barely.

Nevertheless, the present period characterized by exceedingly low interest rates has rendered cash an unappealing option for investors, despite the presence of minimal inflation. Over the past five, ten, and twenty years, holding savings in cash has proven to be disadvantageous as it has failed to match the pace of rising prices, ultimately causing depositors to experience a decline in their wealth.

In comparison, investments in the stock market have produced returns that have outpaced inflation in the last five, 10, 20, and 50 years, as well as since 1926.

Nevertheless, Lamont stated that although stocks are consistently a more advantageous investment than cash in the long run from a mathematical perspective, the challenge lies in the fact that personal circumstances often hinder individuals who hold these assets, leading to variations in their respective timeframes.

"According to extensive historical data, it is highly probable that investing in the stock market offers a higher likelihood of outperforming inflation compared to alternative investments. However, it is important to note that stock market investments are also subject to significant price volatility," he added.

To sum up, there are various dangers associated with both cash and equities. It is important to note that cash is not completely safe from risks as it can lead to a decline in value even with the current top savings rates. Our findings also reveal that keeping cash over extended periods, such as the past twenty years, can result in actual losses.

"However, investing in shares also entails certain risks, particularly when held for shorter durations. Individuals who choose to invest in stocks rather than cash should be ready to face some volatility along the way."