Page 30 - DIY Investor Magazine | Issue 39
P. 30

    INVESTMENT TRUSTS: 6% RETURNS ON CASH – TOO GOOD TO RESIST?
   Nov 2023 30
DIY Investor Magazine ·
Savings rates have rocketed and UK savers can earn more than 6% on deposits. Should higher interest rates change what matters to investors?
Cash savers are benefiting from the highest returns in almost two decades, with one-year fixed-rate accounts currently paying over 6%; the rise has been rapid, with the Bank of England increasing rates 13 times since the start of 2022.
After such a long spell of negligible returns on cash, there are signs investors are now rethinking the role deposits can play in wider portfolios. Schroders’ May 2023 survey of financial advisers found nine in ten advisers were ‘having conversations with clients about long-term investing versus cash deposits’.
All savers’ circumstances are different; some may have excellent reasons to be holding cash, but just because savings rates are rising does not mean cash is keeping pace with inflation.
Even though rates have risen strongly, cash returns after inflation – ‘real’ returns – remain negative; inflation rose faster and earlier than interest rates, so the value of cash has been eroding at a faster pace than for most of the previous decade, despite the better rates available to savers.
So, for many investors, the key question of how much risk to take with their investments remains as relevant as ever. In fact, it is arguably even more important now that the return on cash has improved.
CASH OR EQUITIES: WHICH HAS THE BEST CHANCE OF BEATING INFLATION?
The attraction of cash lies in the certainty of the return on offer; but that certainty lies only in its ‘nominal’ value, not in its ‘real’ value which can be eroded over time by inflation.
And cash rates are notoriously subject to change. In late August, NS&I offered it’s highest-ever rate of 6.2% on its one- year Guaranteed Growth Bonds; just weeks later, that rate was withdrawn.
The attraction of equities lies in the prospect of higher longer- term returns for investors willing to tolerate the risk of shorter- term volatility.
Equities are known as ‘real assets’ because they have historically demonstrated an ability to keep pace with, if not exceed, inflation over time.
The chart below demonstrates this by looking at the historic returns delivered by cash and stock market investments over a range of timeframes extracted from 96 years of data. It then sets these against inflation over the same timeframes.
  POPULAR CASH ISA RATES VS INFLATION
Jan-22 Jan-23 Sep-23
Best buy***
5.00%
5.70%
 Variable 0.30% ISA rate*
2-year 0.50% fixed ISA
rate*
Inflation** 5.50%
1.70% 2.80%
3.90% 5.40%
10.10% 6.70%
  Sources: * average rates, Bank of England as at 30 September 2023; ** inflation, ONS as at 20 September 2023;
*** best buy rates, Moneyfacts as at 10 October 2023.
‘CASH RETURNS AFTER INFLATION – ‘REAL’ RETURNS – REMAIN NEGATIVE’
  




































































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