2023 was a bit of a landmark year for cash savings. For the first time in about 15 years, it was possible to obtain decent levels of interest (4-5%) from savings accounts. Is cash a better option than the stock market for my long-term savings in 2024? Let’s discuss.
High interest rates
I can definitely see some appeal in having money in cash right now.
At the moment, there’s a lot of economic uncertainty – both here in the UK and internationally – with constant talk of a recession.
With banks offering near-5% interest rates, risk-free, cash seems like a decent option.
Low real returns
There are a few issues with cash savings as head towards 2024 however.
One is that, in real terms (after inflation), returns are still quite low.
If inflation was to average 4% next year, for example, real returns would only be around 1% (assuming interest rates stayed the same).
Falling yields
Another issue is that there’s a good chance that savings account interest rates will fall in 2024. Currently, economists expect four interest rate cuts from the Bank of England next year.
In other words, this time next year, we might only be looking at interest rates of around 4% from cash savings products.
So cash has its flaws.
Stocks are cheap
Turning to the stock market, I see the potential for strong returns in 2024 (despite the high level of economic uncertainty).
For a start, UK mid-cap and small-cap shares have taken a big hit – as interest rates have risen – and now look dirt cheap.
If rates start to fall, these stocks could fly.
The mid-cap FTSE 250 index has historically delivered powerful returns in the periods immediately following a peak in interest rates.
Meanwhile, when small-caps have hit current valuations in the past, they have often shot higher in the following years.
Big dividends
Secondly, there are huge dividend yields on offer in the UK market at the moment.
Currently, many FTSE 100 companies, including the likes of Legal & General Group and Aviva are offering yields over 7%.
Tech stocks are hot
Third, US tech stocks like Apple and Amazon are on fire.
These stocks had an amazing run in 2023. But there’s every chance they could keep rising in 2024. After all, we are in the midst of a global technology revolution.
Putting this all together, I’m convinced the stock market is the best place for the bulk of my long-term savings next year.
Higher risk
Of course, stocks are much riskier than cash savings. With this asset class, I could lose money.
I understand, and I’m comfortable with the risks however. A bit of short-term volatility doesn’t bother me.
To obtain the high returns that the stock market offers (typically 7-10% a year, on average), investors have to put up with short-term share price fluctuations.
The best of both worlds
It’s worth pointing out that cash savings and stocks are not mutually exclusive. It doesn’t have to be one or the other.
I will be keeping some money in cash savings next year (mainly for emergencies).
However, the money I’m trying to grow for retirement will predominantly be going towards the stock market.
