Why Leaving Cash In The Bank Instead Of Investing May Not Always Be The Best Option

Events taking place in Ukraine leave the UK and other nations with many uncertainties and the rise of inflation and interest rates have already had a significant effect on us and how we spend our money. As a result, it is understandable why it may seem safer to many investors to leave their money in the bank for the time being instead of investing but this may not always be the best option.

Why should you be investing instead of leaving money in the bank?

It is strongly advised not to leave money sitting in the bank, the reasons being, that investors are always most fearful when prices are falling and are always most excited and confident when prices are soaring. The basic premise of successful investing is to ‘Buy Low and Sell High’. Therefore, the best time to invest is when everybody is fearful and the price is falling. Equally, the best time to take risks off the table is when prices have risen and everyone is confident.

Nonetheless, such discipline requires a strong nerve. No investor, no matter how skilled, experienced, or celebrated, can accurately predict the exact highs and lows within the markets. An investor might be lucky once but to do it consistently would be impossible. Therefore, it is more than likely that an investor buying into a falling market will at first sustain some losses. Similarly, an investor taking profits will often see prices rise further after they have sold.

History shows that the timing of new investment is relatively not important in the context of long-term returns unless the money is to be invested in a few years, for example, to fund retirement.

Investing in the UK stock market

The table below compares the returns of investing in the UK stock market (as represented by the FTSE All-Share Index) with dividends re-invested and the returns of investing in cash deposits with interest re-invested.

From the beginning of the century (2000) to 31st March 2022 (i.e. just over 21 years)

Source: FE fundinfo. Data as of 31^st March 2022. Past performance is not a guide to future returns.

From the beginning of 2010 to 31st March 2022 (i.e. just over 11 years)

Source: FE fundinfo. Data as of 31^st March 2022. Past performance is not a guide to future returns.

What do the returns show?

The returns in the two tables above are very different because the longer, first period includes the two ‘full-on’ declining markets that investors have endured so far this century. Following the ‘Dotcom Bust’ in 2000, UK equities fell by 48% between September 2000 and March 2003.

Similarly, UK equities fell by 46% between October 2007 and March 2009 in the Financial Crisis. Despite these two very big declines, however, equities have still outperformed cash deposits by more than 100% since the beginning of the century. It should also be remembered that cash deposits provided returns of around 5% per annum between 2000 and 2008. Both periods, of course, include the 35% fall in UK equities between January and March 2000 as the pandemic started.

Then again what if the investment in UK equities had been made at precisely the worst time and at a market peak, e.g. on the eve of the Financial Crisis at the end of October 2007. In the following seventeen months, that investor would have suffered a loss of 46% and would have rued not leaving their money in the bank. However, by January 2013 the value of that investment in UK equities had not only recovered completely but had also overtaken what would have been earned in cash deposits. Also, towards the end of March 2022, that same investment made at the peak of the market in 2007 would have delivered a gain of 104% whereas cash in the bank has provided a cumulative return of just 16%.

Inflation

Inflation is the other reason why it is a mistake to leave money in the bank. Given that most savings and pensions are for use in the future, the minimum return an investor should be seeking is the rate of inflation, such that the purchasing power of those savings or pensions is maintained.

Over much of the last three decades, the rate of inflation in the UK has remained very low so the erosion of purchasing power has been modest and possibly acceptable for an investor unwilling to take any risk. It is different now, the latest rate of inflation in the UK (for the year to the end of March 2022) as measured by the Consumer Prices Index is 7%. The old Retail Prices Index, which many would argue is a better representation of the cost of living, is 9%. Both figures are expected to rise further in the months ahead and, although it is probable that they will then decline in 2023, it seems unlikely that the rate of inflation will fall back to anywhere near 2% anytime soon.

Interest rates have risen in the UK over the last few months and are likely to rise further in the months ahead. However, interest rates in the UK are currently more than 6% below the rate of inflation and this gap may increase in the months ahead. The purchasing power and value of money left in the bank are, therefore, falling by more than 6% per annum in ‘real’ (i.e. after inflation) terms. This is substantial.

Comment

In summary, this blog highlights that:

• Over any extended timeframe, equities have provided substantially better returns than cash deposits.
• Timing the peaks and troughs in markets is impossible but it doesn’t really matter if your timeframe is long enough.
• The purchasing power and value in real terms (after inflation) of cash left in the bank is being ravaged by the wide gap between the rate of inflation and interest rates.

It is always advisable to seek professional financial advice when considering investing and our approach to investing utilises well-researched and respected funds, spread across a range of global markets which creates a diversified portfolio that can reduce volatility.

Please note that past performance is not a guide to future performance. The value of an investment can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.