The release of the Marcus account by Goldman Sachs has shaken up the UK savings industry. The account offers a 1.5% interest rate, which is significantly higher than the 0.6% average that’s available in the easy-access savings account segment.
While this may be the case, the reality is that a rate of 1.5% is behind inflation. It’s also lower than the dividend yield of the FTSE 100, which means that for anyone with a long-term time horizon, large-cap shares could be a significantly better option.
Of course, having some cash on hand is always a good idea. There may be emergency costs, such as housing or health, which require an individual to have access to a sizeable amount of cash. Beyond that, though, holding cash is a relatively inefficient pursuit. Historically, it’s underperformed most other major asset classes while, at the present time, it lags inflation.
Even though the Marcus account has a relatively high interest rate when compared to rival products, it’s still around 0.9% below the current rate of inflation. As such, any money invested in the account is set to be worth less in real terms in future than it is today. In other words, the spending power of any cash in a Marcus account (or any other easy-access savings account) is being constantly eroded by inflation.
In contrast, the FTSE 100 has a dividend yield of around 4% at the present time. Not only is this higher than inflation, it’s likely to remain so over the long run. Even if inflation spikes, it’s unlikely to be above 4% for an extended time period, having surpassed that level only briefly in the last decade, for example.
Furthermore, it’s possible to generate a higher yield than 4% from FTSE 100 shares. A number of stocks within the index, and also in the FTSE 250, offer dividend yields of 5%, 6% and even as much as 9%. Certainly, they may be unable to raise dividends at a rapid rate in future due to their uncertain outlooks. But with such a high income return available today, they could also offer good value for money and capital growth potential.
Clearly, investing in the FTSE 100 is riskier than having cash in a Marcus account. However, given that an investor is very likely to end with a real-terms loss from having cash savings over the long run, the risk/reward opportunity presented by an interest rate of 1.5% seems to be rather unappealing.
In contrast, the FTSE 100 has historically offered a total return in the high-single digits. While it’s likely to experience periods of volatility, in the long run it has the potential to not only beat inflation, but to provide significantly higher total returns than cash. As a result, it could be a better place to invest excess capital in order to boost savings.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.