You will notice the heading is in quotation marks and this is because it was the title of an article I saw in the Money Section of The Sunday Times yesterday (12th June 2022), written by Ian Cowie.
Markets had another terrible few days last week as fears of a global recession persist and the war in Ukraine rumbles on, with no end seemingly in sight. Despite this and the extended decline in almost all asset classes since the beginning of the year, Ian Cowie is telling us to take more risk…….and I agree with him. We must never confuse short-term volatility with the possibility of no long-term growth.
Ian’s article follows:
“Why do so many savers and investors misunderstand the relationship between short-term risks and long-term rewards? If that sounds a tad theoretical, then be aware that it might make the practical difference between living where you like and doing what you want, instead of having to settle for something much less enjoyable on both fronts.
The reason I ask is that new savings statistics from HM Revenue & Customs suggest that most people are still making the same old mistake with their annual Isa allowance.
To be specific, two thirds of holders of these valuable tax shelters are wasting time and money in bank and building society cash deposits, despite their meagre returns remaining barely visible to the naked eye.
It is a historical fact that shares reflecting the changing composition of the London Stock Exchange delivered higher returns than cash deposits in three quarters of the five-year periods since records began in 1899.
You don’t need to take my word for it, Barclays Bank publishes an annual analysis of returns from shares (also known as equities), plus cash deposits and bonds (gilt-edged stock issued by the British government) over the past 123 years.
The Barclays Equity Gilt Study shows that if you could afford to set aside money for five years in a row, you had a 76 per cent probability of doing better in shares than deposits. Put another way, the odds of doing better with equities for medium-term investors are slightly better than three to one.
People who could afford to remain invested for ten consecutive years enjoyed a 91 per cent probability of equity outperformance, despite the period of analysis including the Great Depression, both World Wars, Brexit, the Covid crisis and many stock market crashes. If I had to point to a single fact that made me a long-term investor in shares, that would be it.
Of course, there is the short-term danger of loss. If you could only remain invested for two consecutive years there was a 69 per cent probability of shares doing best. In other words, there was nearly a one-in-three chance that deposits would beat shares. What it all boils down to is the difference between the danger of short-term speculation and the rewards of long-term investment.
Against all that, another important fact in favour of deposits is that the Financial Services Compensation Scheme (FSCS) provides a statutory safety net to ensure that you will always be able to get back £1,000 for every £1,000 you deposit with a registered bank or building society, up to £85,000 per institution, per person.
Unfortunately, that guarantee only relates to the nominal value of your money, rather than its purchasing power.
The real value of money you set aside to spend in the future is falling by 9 per cent a year, according to the Consumer Prices Index (CPI) measure of inflation, or 11.1 per cent according to the Retail Prices Index (RPI). If inflation remains at those rates, CPI would halve the purchasing power of money in eight years, while RPI would take less than six-and-a-half years to do the same.
Bear in mind that Barclays has no reason to diss cash deposits because there are fat profits in banks paying individual savers a pittance, while these institutions invest your money to work for their own shareholders’ benefit elsewhere. By contrast, this DIY investor prefers to put my money to work for me.
Better still, in addition to the probability of bigger long-term returns, investors can immediately enjoy more income than savers because many shares pay dividends that beat bank deposit interest rates.
For example, McDonald’s (stock market ticker: MCD), the biggest fast-food chain in the world, which is due to distribute dividends on Tuesday, was yielding 2.3 per cent on Friday.
That’s the value of the income paid to shareholders, expressed as a percentage of the current share price. Interestingly, the independent statisticians Refinitiv calculate that MCD’s dividends have increased by an average of 7.8 per cent a year over the past five years. So, if that rate is sustained, shareholders’ income will double in less than ten years.
None of that is guaranteed but MCD has raised its dividends every year since 1976. Here and now, 30 per cent net profits give a return on investment of 15 per cent, so the burger-flipper should continue to supersize payouts for a while yet.
This DIY investor paid $95 per MCD share in July, 2014, as reported here at that time, and they trade at $238 each now. That has made this business my third-most valuable holding, worth a low six-figure sum.
I could report similar returns from other top ten holdings, including the tractor-maker Deere (DE); the technology giant Apple (AAPL) and the agricultural commodities group Archer Daniels Midland (ADM).
None of these businesses could be described as low-profile or high-risk. But they all beat the banks when rewarding long-term investors for putting our money at risk. I’m lovin’ it.”
Summary
No matter how counter-intuitive it may seem, now is the time to be investing cash (maybe transferring Cash ISAs to Stocks and Shares), for two reasons:
Inflation is going to erode the spending power of your cash savings increasingly quickly if it persists at current levels, or even if it falls back to say, 4% per annum. Unless your cash is delivering at this level (spoiler alert – it’s not) after tax, then you are destined to become poorer, even though the nominal value of your money stays the same.
The markets are at levels last seen more than a year ago, this means, from a long-term perspective, they are at a discount!
I do hope all of the above makes sense but, as always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.
With kind regards,
Yours sincerely
Graham Ponting CFP Chartered MCSI
Managing Partner
