I’ve been thinking about my Stocks and Shares ISA for the upcoming financial year. And I’ve made a bold decision.
For the year ahead, I intend to sell my investments and stay in cash. Instead of dividends, I’m going to earn interest.
The problem with stocks
Investors give three main reasons for preferring stocks to cash. They are as follows:
- Stocks do better over the long term.
- Stocks generate passive income.
- Stocks provide protection from inflation.
Ok. Try telling any of that to Diageo (LSE:DGE) shareholders.
A £10,000 investment in Diageo shares from 10 years ago is now worth £7,385. If that’s not long term, I don’t know what is.
The point about passive income is also wrong. Some stocks pay dividends to shareholders, but don’t forget where that comes from. It comes out of the company’s cash. And if the shareholders own the business, the cash was theirs in the first place.
Diageo shares also show there is no protection from inflation. In fact, inflation is a big reason why the stock has done so badly.
Cash is king
Investing in the stock market might have made sense when I was born (in 1988). But things were different back then. Interest rates were nearly 12%, which meant there was only one direction they could go – down. And that was always going to be good for share prices.
Today, though, things are different. Interest rates are at 3.75% and there isn’t much scope for them to go lower.
That means there’s a real risk that share prices might fall. Investors can’t just ignore this, no matter how much they might like to.
Cash, on the other hand, only goes up and if interest rates rise, it’ll go up even faster. So I’m going to transfer my Stocks and Shares ISA to a cash one.
April Fools!
Did I get you? I almost got myself for a moment there…
I’m not selling out of my Stocks and Shares ISA and I don’t think cash is a better long-term bet. But what’s wrong with the arguments I made above?
In the case of Diageo, the stock has faltered for two reasons. One is that it was trading at a price-to-earnings (P/E) ratio of 24 a decade ago.
That didn’t leave much room for things to go wrong. So when the business came up against challenges – even temporary ones – the share price crashed.
The story with stocks collectively, though, has been quite different. The FTSE 100 has outperformed cash by a long way over the last decade.
It’s true that dividends only return cash to investors. But what I said above ignores the fact that really good businesses are really good cash generators. Diageo’s brands give it the ability to make products at one price and sell them at higher ones. And that does generate cash.
Inflation remains a risk. But cash doesn’t get around that issue, even if interest rates do go higher.
2026-27
It’s a fair point that share prices are unpredictable in the short term. That means nobody – including me – should be investing cash they think they might need to draw on before retirement.
Beyond that, though, getting money into my Stocks and Shares ISA is my priority for 2026-27. And Diageo is one name among many that I’m thinking about.
