The Motley Fool

Cash is dead. Long live stocks and shares!

So farewell cash. You were much admired in your prime, the people’s 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 painful to behold. At least now the misery is over. Cash is dead.

Dash from cash

The average easy access cash Isa currently pays just 1.04%, according to Rates continue to slide: two years ago the average return was 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 there’s 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.

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If you invested £10,000 at 1.04% for 10 years, your money would turn into £11,090. That would give you £1,090, a total return of just under 11%, over an entire decade. Now that’s 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 early access. Again, that return is dwindling. Five years ago, the average five-year fixed-rate ISA paid 2.59%. Today, you get 1.98%.

Perhaps I’m 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 weight to 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 week but governor Mark Carney has been sounding out banks and building societies to see if they could withstand lower interest rates. Cash stands condemned.

Taking stock

I’m 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 has at least preserved your money. Yet stock markets still offer several attractions that cash doesn’t. 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, by reinvesting them back into the stock. If you do that, they’ll generate 75% of your total returns over the longer run. 

Down is up

Perhaps the strangest thing about stocks and shares is 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 they’re high and rising and pricey.

The important thing to remember is that stocks and shares are a long-term investment. You shouldn’t 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 you’ll ever get on deposit.

Cash is dead. Long live shares!

In the longer run, stocks and shares can generate serious money.

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