Interest rates have risen at a breathtaking pace in the last 12 months, with the Bank of England hiking at eight successive meetings. This has lifted bank rates from 0.1% in December to 3% today, the highest in 14 years.
This is good news for savers with cash in the bank, as they can finally get a decent return with minimal risk. I could now get 4.60% a year from a one-year fixed bond, or 5% a year if I tied tied up my money for five years.
Savers deserve higher interest rates
For too long, savers have been ignored. It’s been a particular problem for retired people who no longer want the risk of investing in shares, but still need a decent return on their money.
At the same time, stock markets have been volatile this year. Many investors are wary, worried they will fall further. Some might even have sold shares and put the proceeds in the bank instead. I think that’s a mistake, and one I don’t plan to make myself.
For the last dozen years, investing in shares has seemed like a no-brainer to me. The stock market has delivered a far superior return to cash. Now it’s a more balanced argument as interest rates rise, but I still favour shares.
I think it’s more tempting to buy shares today, when stock markets are down, than last year when they were flying. The FTSE 100 is packed full of bargain shares, trading at historically low valuations. Many have fallen sharply in the last year, which means I can pick up more stock for the same amount of money.
I still prefer FTSE 100 shares to cash
The months ahead will be tough, as the world potentially tips into a recession. But history shows that markets always recover from a dip, or crash, given time. This time next year, we may be feeling a bit more optimistic. I certainly hope so.
If that positive scenario pans out, buying shares today could prove to have been a wise move.
As ever, there are no guarantees. I accept that any of the stocks I buy today could have further to fall. That doesn’t worry me too much, because I’m buying shares with a view to what they will be worth in two decades’ time, not two weeks.
If the market falls further, I would aim to buy yet more shares at the lower price, rather than panic and flee to cash. The cheaper, the better. Then I will hold on for the long-term while waiting for the global economy to improve. I believe it will at some point.
Once we slide into recession, central bankers will stop hiking interest rates and start cutting them instead. When that happens, my stock picks will hopefully rise (at the same time as savings rates start retreating).
I will always keep some rainy day money in the bank for emergencies. But I think shares are still my best shot at building the wealth I need to get rich enough to retire early. Whatever happens to interest rates.