UKH

I know the ubiquitous talk about cash investments eroding away due to inflation.  But if the cash rates are similar to the annual returns of many stocks and share funds, then what makes those investment funds better?

Currently you can get around 5%/year or more for the next 2-3 years on cash.  Typical "easy" S&S funds like Vanguard, currently only make about that (or usually less) per year. [I know you might do better wheeling and dealing ...but I'm only talking easy investing here.]

During that next 2-3 years, surely our inflation rate at 7-10% will eat away the value of both the cash and the investment fund equally, no?

In fact what's wrong with putting away an amount in cash for the 2-3 years for a guaranteed 5%, and when it matures you stick it into a S&S fund.  Win-win.  Or is there something else at play?

The hidden minor risk here is an attempt to time the market by comparing today's high returns on cash with longer term stock market average returns.

If I were a higher rate tax payer with a mortgage, I would pay that down as much as I could.  That gives safe return at a gross level (interest of 6% means effective return of 10%).

Nothing wrong with that.

Although generally you have to play a longer game with general stocks and shares funds ( unless you are day trading shares). 5 years is a better horizon for these( and most charts do say 5 years minimum  and suggest that if you do that then they will outperform cash).2-3 years is not really long enough.

This suggests you have to hold your nerve and not chop and change.

Cash investments aren't bad (good thread title though). All investments are a gamble; cash in an interest-bearing account is low risk, but usually low return, and has the advantage that you keep your capital.

Stocks and shares usually make good long term investments, market crashes apart. The FTSE 100 made something over 10% for the last year, but lost 3% over the last six months, and over the last 5 years has only made 1.7% per year, owing to the pandemic crash. So it can seem like a lot of time and effort for little return when that sort of thing happens. Nevertheless, for things like pensions it makes a lot of sense, and a lot less effort than investing in property, which is a popular alternative.

If you have a lump sum, an ISA is a good thing to look at as the returns are tax-free. You can put in up to £20,000 a year, and can do cash or stocks and shares.

If you have more than that, you should probably get some proper advice from a qualified person. Be aware that their business apart from the advice is to manage your money in a portfolio account of mixed investments and to take a small annual percentage for doing that.

AVCs to your pension fund are the best option for many people

Thank you all for your fast replies.

OK, that's great.  It all aligns with my understanding.  I get the long-term advantages of S&S funds and riding out dips in the share market etc.  But for the next 2-3 years it seems a reasonable hedge to use some of those 5-6% cash accounts for £10-50kish of cash.

Alongside S&S funds currently riding out the dips -- I might add.

It's just that there is so much doomsday talk out there about cash investments.  Yet for a few short years around now I couldn't see why they were such a bad idea.

Can you explain this? Why does interest of 6% mean effective return of 10%? Also how is tax rate relevant - there's no tax relief on residential mortgages in the UK.

He means that you keep all of the 6% benefit if you pay down mortgage, whereas if you put it in cash deposit, the benefit (interest) would be taxed at 40%/45% in this scenario.

Perhaps better to say that the deposit interest is a3.6% net return whereas the mortgage reduction is a 6% net return.

Oh, and the main point he made about the priorities in those circumstances is spot on

Yep , sensible compromise. 

 During that next 2-3 years, surely our inflation rate at 7-10% will eat away the value of both the cash and the investment fund equally, no?

Inflation forecasts are much lower than this, CPI trending to 0% next year. Obviously just forecast and risks etc. 

When I looked (last week) return rates on cash savings were starting to fall. If you're thinking of opening an account don't hang around.

Are you sure you included dividend reinvestment in those numbers for an index tracker (where annual fees are often below 0.1%)?

Gotcha, that makes sense.

One thing to be aware of for non-ISA cash investments.  If the savings are locked up for a fixed period, the tax liability for interest all falls in the year when you can access the cash i.e. if you lock in for 3 years, you'll pay tax on the total interest earnt over those 3 years in the final year.  

At 5% interest it's quite easy to end up over the £1000 allowance for interest, and could make your overall return a lot less favourable.  The longer you lock the cash away for and the higher the interest rate, the more this applies.

The same context applies to other investments though ( on the assumption you have used up your annual ISA allowance)

Depends on risk tolerance and investment horizon.

That is a good point.  Doesn't apply in my case, but is a good reminder.  Cheers!

No. It was a very simple example of how S&S can go up and down.

And also an example of why not to put everything in a FTSE fund. 

As other's have mentioned though, it's all about timeframes here. If there's a good chance of needing the money in the next 5 years, say you're saving for a deposit, or just saving up an emergency fund etc then cash can be a good option. 

With investing, the longer the time frame, the better. The longer you can invest, the more likely it is that a well diversified investment portfolio will significantly out perform cash. So yes, during the next 2-3 years it's true that when factoring in inflation, your investments may not do any better than cash. There's a good chance they will do worse than cash, maybe significantly so over the next 2-3 years, or vice versa, they might end up blowing cash returns out of the water. Nobody knows. 

Personally, I just ask myself the following questions; What is the money for, and when am I likely to need or want it? General rule of thumb is if the timeframe is less than 5 years, or if it's for say an emergency fund or cash buffer, then cash is a good option. For anything beyond 5 years, investing starts to become the better option. So just ask those basic questions, and let that guide you. 

One thing to avoid, is not investing just because the short-term volatility and news scares you. That's called timing the market, and it's generally a futile exercise. 

This excellent video below explains it much better than I've done, and is well worth a watch.

youtube.com/watch?v=oeob9z27-gA&

It's a dishonest position then, as a FTSE 100 tracker either pays income or dividends are reinvested.

"How the FTSE 100 returned 122% in 20 years but barely moved"

https://www.schroders.com/en-gb/uk/intermediary/insights/dividend-reinvestm...

Other trackers are available and many did way better.

A good article. Most people do not realisethe shift in the U.K. stock market to dividend payments away from growth.  If you want growth  then the USA is for you. 
 

There again most balanced or portfolio funds have both markets in their portfolio so it’s covered both ways. 

 You can never learn enough about these things imho. 

 

That's a good video.  Cheers.

I guess I'm playing that timing the market gamble for the next 2 years for a proportion of my funds.

For the next 2 years only, I bet that my guaranteed 6%/year cash returns will be better than (or about the same as) the expected returns on my diversified S&S funds over the same period.  After that the boosted cash funds will go back into S&S funds.

Will be interesting