Investing in shares has made more than stashing your money away in savings accounts over the past 35 years and is “more than likely” to continue to do so over the long term, said interactive investor.
The investment platform has calculated that investors who made full use of the government schemes in the past 35 years would have a total pot of £1.4m had they invested it in shares, effectively making them millionaires.
Their gains would be four times the amount they put in during that time (£377,760), which is in stark contrast to the returns on offer from the same amount invested in cash, (£591,386).
The research spans from 1987, when the Personal Equity Plan (PEP) scheme was launched, through to 1999, when it evolved into the ISA allowance scheme, and up to 5 April 2023. In these 35 years, interactive investor assumed that the full allowance available through these tax schemes was invested in the FTSE All Share index on 6 April each year.
An investment mirroring the performance of the FTSE All Share would have delivered an almost fourfold return, while the one-month LIBOR rate (used as a proxy for the return of savings accounts), would have fallen short in the same timeframe, when UK rates ranged as high as 13.9% and as low as 0.1%.
This reflects the so-called ‘get rich slow’ approach, which is not dissimilar to that taken by ii’s ISA millionaires, who at last count had an average age of 73 and would have likely started their investing journey in PEPs before graduating over to ISAs, read the report.
The data is “a thought-provoking illustration of the long-term potential of the stock market”, which encouraged people not to underestimate stocks and shares despite the attractive savings rates that can be found in the market today.
Due to the Bank of England’s rate hikes, savings rates have regained some lustre and can offer competitive yields after a decade in the doldrums. But while savings accounts might look attractive in the short term, a look back at history shows that “investing is king over the long term”, said Myron Jobson, senior personal finance analyst at interactive investor.
“Cash is certainly back. There is no denying the allure of cash following a significant uptick in savings rates, but our research illustrates that, over the long term, it is costly to ignore the stock market,” he said.
“Savings rates are attractive, with the top deals offering a rate of interest north of 4%. But it is unhelpful to view savings rates and investment returns in the same way because it creates an expectation of having a steady annual return, when the reality is you could get a double-digit return in one year and a loss the next.”
For the analyst, the key is to give your money ample time in the market to smooth out the effects of weekly ups and downs, and not to forget that cash rates fluctuate too – there’s no telling if a good rate now will still be there in the future.
For Dzmitry Lipski, head of funds research at interactive investor, allocating to cash savings only makes sense as long as it makes a positive real return (less inflation).
“Given the current inflation rate is much higher than rates on offer from retail banks, it makes sense for long-term investors to favour investing over saving, even if it’s in simple index trackers,” he said.
“As we move into a more uncertain market environment, it makes sense for cautious investors – or someone approaching retirement – to focus on capital preservation and limit volatility by maintaining a reasonable cash buffer within a well-diversified portfolio. For those who can afford to keep their money tied up in investments for at least five years and are happy to tolerate inevitable stock market volatility, it is smart to keep money invested.”
On the other hand, cash savings accounts are the way to go for short-term savings goals – generally those less than five years away.
“It is also important to maintain a healthy rainy-day fund – three to six months’ salary worth is a good rule of thumb,” said Jobson.