Had you put it in a cash ISA which paid interest in line with the Bank of England bank rate you’ d now be on about £ 11,500. More, but still not great. Cash deposits have a dreadful track record of beating inflation in the long run. So is that cash ISA really“ risk free”?
Inflation is a risk.
The risk of not taking enough risk
Consider two alternatives. In one, you contribute X % of your salary a month and it gets invested in the stock market The market goes up, it goes down but, in the long run, it is projected that you have a high likelihood of being able to retire aged 65 with enough money to afford a comfortable retirement.
In scenario two, you are worried that the stock market is too risky so instead plump for something“ low risk”. You sleep more easily at night. But, because your savings won’ t grow by as much, it is projected that you will need to keep working well into your 70s until you will have saved enough to be able to retire.
Which option appeals more now? Which is really riskier?
Not taking enough risk is a risk. People need to be more aware of the trade-offs.
The stock market is risky in the short run but less so in the long run
It is absolutely the case that investing in the stock market involves risk, in terms of potential for your investments to fall in value. Over the past 53 years, the global stock market has fallen by at least 10 % in 31 of them, for sterling investors. This kind of thing happens in more years than not. 20 % declines have happened roughly once every five years 2. Again, not an unusual occurrence.
But the trade-off is that, even allowing for these unpleasant slumps, the market has been a fantastic wealth generator for investors. Over this period overall, the global stock market has returned 11.4 % a year, much more than the 4.8 % rate of inflation.
We can look even further back using data on the US stock market and then the results are even clearer.
In the long-run, stocks have beaten bonds which have beaten cash
US asset returns in excess of inflation 1926-2024
Past performance is not a guide to the future and may not be repeated. Data to Dec 2024. 1926-2023: stocks represented by Ibbotson ® SBBI ® US Large-Cap Stocks, Corporate bonds by Ibbotson ® SBBI ® US Long-term Corporate Bonds, Government bonds by Ibbotson ® SBBI ® US Long-term Government Bonds, and Cash by Ibbotson ® US( 30-day) Treasury Bills. Source: Morningstar Direct, accessed via CFA institute, LSEG Datastream, ICE Data Indices, and Schroders.
So yes, the stock market ride can be bumpy. But when you see this happen, don’ t be spooked. It’ s entirely normal. It is the price of the entry ticket for the long-term gains that the stock market has the power to deliver.
The chances of being able to achieve your financial goals would have been much higher if you invested in the stock market than if you parked your money in cash. It is less risky than cash when viewed through this lens.
It’ s not even just that the stock market has beaten cash in the long run, it also has a much better track record of doing so over every reasonable investment horizon. The stock market has been less risky than cash in terms of likelihood of beating inflation. And the longer you invested for, the more the odds would have shifted in your favour. There have been no 20-year periods in our analysis when stocks lost money in inflation-adjusted terms.
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