How investing could provide more than cash over time

When stock, bond, and currency markets are volatile, it’s understandable that investors see advantages in keeping more of their wealth as cash. And, of course, it’s essential to have cash to hand as an emergency fund as well as important to keep cash for your short-term needs.

But history shows that stock markets tend to bounce back quickly from geopolitical crises and deliver growth over the long term. So, it could also make sense to stay invested not just when markets perform well, but during more challenging periods too. Pulling out when they fall could mean missing out when they recover.

It’s worth remembering, though, that past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

Despite the current market volatility brought about by Russia’s invasion of Ukraine, we’re still seeing relatively solid fundamentals which should support investing – by which we mean things like economic growth, company cash flows and unemployment levels. This bodes well for investors.

However, when it comes to cash, the fact remains that if the interest paid on your long-term savings isn’t keeping up with inflation, you won’t be able to buy as much with it in the years to come. And with inflation rising by 6.2% in the 12 months to February and interest rates currently at 0.75%, that’s a very real issue right now.

ECONOMIC GROWTH SLOWS BUT CONTINUES

Let’s take a look at some of those fundamentals. In the UK, the economy continues to grow, albeit at a slower pace than initially expected. The country’s GDP grew by 0.8% in January, according to the Office for National Statistics (ONS), and it’s now 0.8% above pre-Covid levels.

The war in Ukraine will no doubt have an impact, but it shouldn’t derail this growth.

The National Institute of Economic & Social Research (NIESR) forecasts GDP growth of 0.5% in February and 0.3% in March. And in 2022, the UK economy is expected to expand by around 3.8% according to Office for Budget Responsibility.

Rising inflation itself can also be a sign of strong economic growth. Although it’s currently going up faster than expected driven in part by high energy costs, which Russia’s invasion is exacerbating, and Covid-related supply constraints.

The Bank of England has increased interest rates twice this year to help manage inflation – they are now at 0.75%. But that’s still relatively low. And again, the invasion of Ukraine could have an impact here. This time, interest rates could rise slower than planned to help consumers and businesses mitigate additional day-to-day living costs.

Meanwhile, unemployment remains at near historic lows. Between November and January the rate was 3.9%, according to the ONS, which compares favourably with the 5.1% recorded at the height of the pandemic.

KEEP THE LONG TERM IN MIND

For investors, this all has several implications. By the end of February (as at 28 February 2022), the FTSE 250 and the S&P 500 were higher than they were at the same point 12 months before, and they are 136% and 278% higher respectively than they were 10 years ago (again, as at 28 February this year).

In short, staying in equities over the long term, which we view as about five years or more, could still pay dividends.

The diversification Coutts portfolios and funds provide – investing in a spread of sectors, geographies and asset classes – can also help mitigate short-term risks.

Savings accounts have an important role to play in any financial set-up, as they enable you to access funds quickly and don’t carry risk in the same way as investing.

But with interest rates currently far below inflation, keeping significant amounts in cash could see the overall purchasing power of that money decline in real terms. And investing could be an effective way around that.

For more information, please contact your private banker.