Cash is King
It’s an old joke that shares can go down as well as plummet. And plummet they have over the last few weeks. Shares in our biggest hundred companies lost more than 7% of their value in the 25 days after 13 July. In some ways this behaviour is normal. Shares do go down as well as up. That’s where the risk – and for some people the opportunity – is. For example if you invested in shares at their nadir on 13 March 2003 you would be looking at a healthy 90% gain on your money – around 16% a year. On the other hand if you had invested money in shares when ISAs began in April 1999 you would still be nursing a 1.5% loss over those eight years – and kicking yourself that you had not put the money in a nice safe cash account instead.
Over the long term – between 20 and 50 years – shares have performed consistently well. But as we get older there is less of the long-term left. We cannot tie our money up for 50 or twenty or even ten years. We want it to work and produce an income now. And in those circumstances the quick fix of cash looks more and more attractive. At the moment you can get at least 6.25% in a cash savings account with no strings. After basic rate tax that is still 5% - and with no risk that in ten years time your money will be worth less than it is now. If you do not already have a mini cash ISA you can put up to £3000 into one of those and get a tax-free return of 6.3% on that slice of money. Cash returns are way above inflation however you measure it.
Over the long term the return you get on shares is supposed to be more because your money is at risk. The extra is a kind of payment for the risk you take. It is called a risk premium. At least that’s the way it’s normally explained – conveniently ignoring the fact that risk means you may lose money. But over the very long term the return on shares has been around 7% a year according to Barclays’ annual Equity Gilt study. But that figure is before charges, so deduct at least 1% and possibly more from that leaving you less than a 6% return. Now you can get that in cash with no risk it is probably the time to stick with certainty.
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