Stocks versus cash: is it worth the risk?
By Mike Narouei, Content Producer at Boring Money
7 Mar, 2017
There is no such thing as risk-free investing, but taking a bit of risk when saving for a long-term goal can pay off better than saving in cash. Millennial Emily explains more...
I’m a Millennial, stuck in a generation full of stereotypes including one that really bugs me – we don’t know how to save money. Truth be told, it’s not that I don’t know how to save, I’m just suspicious of saving. I’ve grown up watching money crash and burn around me, and so I'm hesitant to trust providers and products where I seem to have little control. I am now in my mid-20s, wary of bank loans, bank accounts and credit cards because they seem to do more damage than good, and don’t see any difference between a savings account and keeping my savings in cash under the mattress. But in the past year, I have learnt that there is a way to make your cash savings multiply without much effort or loss of control.
When it comes to saving money, most people are like me and save in cash. Even with low interest rates and crappy bank charges, people still seem wary of saving in any other way, which isn’t that surprising given the past economic events. Whether it’s a stash of notes in an envelope stuffed in the back of your sock drawer or the opening of a specific saving account, cash is still king. But with historically low interest rates, there has to be another way to make your money go further. Good news – Barclays has released a report which suggests there is another way - stocks and shares (https://www.boringmoney.co.uk/learn/investing-guides/product-guides/stocks-shares-isa/) outperform cash massively over long periods of time. So what exactly does this mean for us everyday savers trying to make our cash stretch?
There is no such thing as risk-free investing, but taking a bit of risk when saving for a long-term goal can pay off better than saving in cash. For example, if you manage to save £10,000 in cold, hard cash, that is the exact amount you will have plus a tiny bit of interest. Great, right? That’s what you wanted to achieve. But what if your £10,000 resulted in a grand total of £10,580? Where did the extra £580 come from? Definitely didn’t find it down the back of the sofa. It’s from investing instead of simply saving – over a 10-year period from 2005-2015, stocks had an average return of 2.3%, according to Barclays’ study. Add that to the pot every year and it adds up over this 10 year period. At the current rate of interest – 0.25% – investing in a cash account would have produced just an extra £25 a year. I know which amount I’d prefer.
Also, if you invest in a company which pays their investors a cut of the company’s profits (which is called a dividend income in finance-speak) you could boost your end total by even more. For example, if you had invested £100 at the end of 1990, and had reinvested the dividend income from the company, it would have been worth £378 at the end of 2015. If you invested in the FTSE 100, you could receive a dividend income from well-known brands including BP, EasyJet, Marks and Spencer, Vodafone, and Sainsbury's. You’re welcome.
This all sounds pretty ideal right? But in 2008, the FTSE 100 fell by 31%. That means if you had invested in 2007, and had to take the money out of the stock market in 2008, you would have been stuffed. This is why you have to invest for the long term rather than short term – in 2009, the FTSE went back up by 22%, and then again by 9% in 2010. Keeping a cash fund for everyday matters, like needing the boiler fixed, or even saving for Christmas later in the year, is essential, as you might need to withdraw the money in an emergency. Planning for something in 5 years? It’s worth sticking some savings into stocks and shares to try and maximise the income. Just remember that as with all investments, there is a risk factor involved. Stocks and shares can hop around like an angry grasshopper, so they are better for long-term investments of 5 years+.
When it comes to investing in the stock market, it’s easier than you would think, and is often quicker than opening a bank account. There are two main ways to invest – the DIY way (https://www.boringmoney.co.uk/learn/articles/stocks-versus-cash-is-it-worth-the-risk/#), which is similar to cooking a meal from scratch, or the quicker ready-meal option (https://www.boringmoney.co.uk/learn/articles/stocks-versus-cash-is-it-worth-the-risk/#) of the investing world. With the DIY way, you pick the supermarket-provider, products and raw ingredients, and voila, an investment meal is made. With the ready-meal, you just pick the supermarket-provider, decide how spicy you want your dinner to be, and pick something off the shelf. Most providers offer accounts with low-entry deposits, and monthly direct debits of as little as £50. There are also handy apps available for those who want to see exactly what’s going on behind the scenes – I use Moneybox (https://www.moneyboxapp.com/), which rounds up my bank card transactions and invests them into a stocks and shares ISA (https://www.boringmoney.co.uk/learn/investing-guides/product-guides/stocks-shares-isa/). I can choose how much to invest on a weekly basis, top up when I feel like it, and see the performance of my money, all with the swipe of my smartphone. Great.
There’s nothing to be scared of when it comes to money. It makes the world go round, as they say. But it is important to consider how to make your money work harder for you in a time when we are working extra hard for our money in the first place. Don’t leave it stuffed in your sock drawer. Invest in stocks, and watch it grow.