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Make no mistake about it, interest rates on savings accounts have gone through the roof.
12 months ago the top easy-access deal paid a pitiful 0.65% AER variable. Today the top rate pays 5% AER variable (at the time of writing). Meanwhile, we’ve seen UK-based stocks struggle this year, with both the FTSE 100 and 250 in the red since January
So given all this, you’ll be forgiven for thinking now’s the time to dump your investments. After all, why risk your capital when you can earn a 5% risk-free return?
Yet before you ditch your investments, it’s worth knowing there are several reasons why investors may wish to think twice before offloading their shares right now. Keep on reading for the all details, or click on a link to head straight to a section…
The Bank of England’s base rate has a huge impact on borrowing costs and savings rates. So far this year, the central bank has hiked its base rate on not one, but FIVE occasions.
On 1 January the base rate stood at 3.5%. Today it sits at 5.25% (and the Bank of England may increase rates further next week on Thursday 21 September)!
Because the cost of borrowing has risen so much this year, savings rates are also climbing. This is because banks are becoming increasingly desperate to attract deposits from retail savers.
At the time of writing on Tuesday 13 September, the top easy-access savings account pays a cool 5%, while the top one-year fix pays a slightly higher 5.66%. If you’ve been following the savings market over the past few years you’ll know these rates are rather extraordinary given sub-1% rates were commonplace just a year or so ago.
In fact, savings rates had been so low, for so long – thanks to a decade and a half of ultra-low interest rates – that savers wanting any sort of return on their capital over the past few years have had little choice other than to invest.
However, given savings rates have risen so much over the past few months, this is now no longer the case.
We know savings rates have risen this year, but what about the stock market? We’ll… if you’ve taken a punt on a FTSE tracker in 2023 it’s likely you’ve ended up a tad disappointed.
If you’d invested in non-UK stocks, however, then there’s a fair chance you’ve had a different experience. Germany’s ‘DAX 40’, for instance, is up 11.35% while the French ‘CAC 40’ has enjoyed a 10.25% rise this year. Across the pond, the Nasdaq Composite is up 30%, while the S&P 500 has risen 16%.
Given savings rates are on the up, it’s likely many investors – especially those holding UK stocks – are questioning whether it’s worth trying to second-guess the stock market these days. After all, when investing your capital is at risk. This isn’t the case when you put your cash in a savings account (as long as it’s covered by the FSCS).
Yet despite this, there are still good reasons why you may wish to avoid selling your shares in favour of a savings account – so let’s explore them…
Yes, savings rates have trumped stock market returns this year (when compared to UK stocks) but over time, investing generally beats saving.
Let’s take a look at the average returns of the FTSE 100…
Over the past 5 years, the blue-chip index has delivered an average annualised return of 3.77% – don’t forget this figure includes the 2020 pandemic stock market crash. Meanwhile, the FTSE 100 has delivered an average annualised return of 12.9% over the past 10 years, and 6.79% over the past 20 years.
These average annual returns are much higher than the average annual returns of a typical savings account. This means anyone who’s invested, rather than saved, over the past 10/20 years is likely to be better off than they would have been had they stashed their wealth in a savings account.
And while past performance shouldn’t be relied upon to predict future stock market performance it’s a fact that, generally, assets such as stocks, bonds, real estate have all historically performed better than cash sitting in a savings account.
Investing can offer a decent chance of preserving, or increasing your purchasing power when inflation is high. This is especially true if you invest in a mix of assets, such as those known to provide a decent hedge against inflation.
In contrast, when it comes to saving, you’re unlikely to find a decent savings account paying more than the rate of inflation. Remember, cash stashed in a savings account paying less than the rate of inflation is essentially a ‘losings’ account. That’s because the value of your money is effectively being eroded over time. And while investing carries absolutely no guarantees your wealth will beat inflation, it does, at the very least, give you a fighting chance.
It almost goes without saying but investing allows you to diversify your portfolio by spreading your money across different asset classes and industries. This can help reduce risk because if one investment performs poorly, others may perform well, helping to balance out potential losses.
In contrast, when it comes to putting your cash into a savings account there’s nothing much you can do if you want to gain exposure to a mixture of assets to boost your returns. Instead, you’ll have to rely on the generosity of your savings provider.
It’s true to say there’s no right or wrong answer when it comes to choosing whether to invest your wealth, or save. That’s because your decision should be based on your tolerance for risk and investing goals.
Yet while it may be tempting to sell your investments in order to benefit from rising savings rates, it’s important to first weigh up the pros and cons. For example, if you’re willing to invest for a long period of time, then rushing to move your investments into cash may turn out to be a foolish move. After all, as mentioned above, returns from investing usually beats savings – which becomes very evident when you study the data over a long period of time.
That being said, if you are risk-averse, then you’ll be forgiven for wanting to turn to savings accounts right now, especially as it’s now possible to earn up to 5% risk-free. This is way, way higher than a few years ago, though don’t forget that inflation is also high right now!
If you decide to stick with investing then it’s still worth understanding the importance of holding an emergency fund. It’s often suggested that you should have three months’ worth of essential outgoings to fall back on, so you won’t be criticised for stashing this sum in a savings account – even if you’re a militant investor!
If you’re looking to invest for the first time, do take a look at our ultimate guide to investing for beginners.
And while we’re at it… do you want learn more about investing? If so, why not sign up for our fortnightly MoneyMagpie Investing Newsletter? It’s free and you can unsubscribe at any time.
Disclaimer: When investing your capital is at risk. Remember, the value of any investment can both rise and fall. Always do your own research.
MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.