5 months ago • 2 mins
Low interest rates are a welcome sight when you’re looking to secure a mortgage, but when you’ve got money to invest, the high side presents some opportunities. In the US and UK, your cash can yield you up to 5.5% in a high-interest savings account. And that’s more than half the 8.14% average annual return from the S&P 500 over the past two decades (2002-22). But, historically, the problem with cash has been that it’s not as great at preserving your wealth compared to stocks.
This chart looks at the past performance of cash and stocks over different time periods using data going back 96 years. It also compares these returns to the effects of inflation during those same periods. Over the very short run (one to three months), cash is mostly comparable to stocks in beating inflation. But this gap widens more significantly with time: big-cap stocks beat inflation 76% of the time over a three-year period, compared to cash holdings’ 55%. Drag this out longer and you’ll see that stocks beat inflation 100% of the time over a 20-year period.
To put it simply, you’re better off holding stocks over cash for the long term. But that doesn’t mean there isn’t a place for cash in your portfolio. Remember, compared to any time period over the last hundred years, stock valuations have never been as frothy as they are today. And that’s not even factoring in the risks of a recession over the next 12 months, which could make it a rough ride for stocks. Cash may not be the right investment if you’re investing for two decades, but with yields where they are today, you’d do well locking in some of those gains. And, fortunately for you, I’ve identified some opportunities where you can take advantage of higher interest rates.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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