So farewell cash. You weremuch admired in your prime, the peoples investment, loved by the masses. Many went as far as to say that cash was king. Your slow decline over the last seven years or so has been painfulto behold.At least now the misery isover. Cash is dead.
Dash from cash
The average easy access cash Isa currently pays just 1.04%, according to Moneyfacts.co.uk. Rates continue to slide: two years ago the average returnwas 1.24%, five years ago it was 1.51%. The recent ISA season was the worst ever, as rates hit rock bottom. Cash has been a disaster for years and theres little sign of a recovery. In fact, with the Bank of England apparently discussing the impact of cutting rates further, we may see further slippage.
If you invested 10,000 at 1.04% for 10 years, your moneywould turninto 11,090. That would give you 1,090, a total return of just under 11%, over an entire decade. Now thats better than being poked with a sharp stick,but only just. Especially since inflation will have eroded much of its value in real terms.
In a fix
You can get a better return on fixed-rate savings, but only if you lock your money away for up to five years, with penalties for earlyaccess. Again, that return is dwindling. Five years ago, the average five-year fixed-rate ISA paid 2.59%. Today, you get 1.98%.
Perhaps Im exaggerating the death of cash. It still makes a good short-term home for your money and everybody should have a rainy day fund for emergencies.Cash can also be used to add a bit of weightto your portfolio, securing it against stormy economic seas, but in the longer run this is dead weight.
The Bank of England may have held base rates again last weekbut governorMark Carney has been sounding out banks and building societies to see if they could withstand lower interest rates. Cash stands condemned.
Taking stock
Im not going to tell you that all has been sweetness and light for stock and shares lately.The FTSE 100 has fallen 11.9% over 12 months, while cash hasat least preserved your money. Yet stock markets still offer several attractionsthat cash doesnt. Like dividends. The FTSE 100 currently yields around 4%, roughly four times the rate on cash, with all the capital growth on top of that.
Better still, dividends can be used to multiply your capital growth, byreinvesting them back into the stock. If you do that, theyll generate75% of your total returns over the longer run.
Down is up
Perhaps the strangest thing aboutstocks and sharesis that long-term investors benefit when markets briefly fall. That is because your reinvested dividends actually pick up more stock when markets are lower. The same applies for new money you invest in the market: it makes more sense to invest at times like today, when markets are down and shares are cheaper, than when theyre high and rising and pricey.
The important thing to remember is that stocks and shares are a long-term investment.You shouldnt invest for less than five or 10 years, and the longer you can commit yourself, the better your chances of getting a far livelier return than youll ever geton deposit.
Cash is dead. Long live shares!
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