Why invest in markets when cash rates are so high?

In August, the Bank of England’s base rate rose to 5.25% – its highest level since April 2008. That’s up from 0.1% in December 2021. The days of receiving virtually nothing for the privilege of keeping your money at your local bank are apparently over.

With the above in mind, I ask myself the question; With cash savings rates so high, why do I remain invested?

For me, the answer is easy. I take a medium-to-long term investment view, I retain sufficient accessible cash to act as a contingency fund, and I look beyond the short term volatility.

Reasons to stay invested

1. Doing nothing will cost you
Inflation’s eroding powers act as a reminder of why it’s important to invest or save with a decent return in mind

2. Money Illusion?
The real return on cash is as unattractive as it has been for decades, which means your purchasing power is at risk of erosion

3. Time in the market and not timing the market
Staying invested in markets rather than trying to time entry and exit points is likely to pay off in the long-term

4. Remain committed to your medium to long term plan
Investing with a medium to long term outlook is the best way to reduce the impact of stock market fluctuations and to grow your investments over time.

Doing nothing will cost you

Whether metaphorical or not, keeping your cash “under the mattress” will see the value of your savings fall in real terms due to inflation. This concept is nothing new, but never in modern times has it been as much of an issue as it is today.

UK inflation rose to 7.9% in the 12 months to June 2023. That’s the sixth highest point since the 30-year high peak of 11.1% reached in October 2022. In practice, this means that what £10,000 would have bought you a year ago will require £10,790 today. In other words, that’s a loss in purchasing power of £790.

Another way to look at it is that, at today’s inflation rate, it would take around eight years for your cash savings to halve (assuming no returns on cash). This compares to 34 years with inflation at 2%, which is the average rate that prevailed for most of the last three decades.

Number of years it takes for your £10,000 cash savings to halve at different levels of inflation.

Conclusion: Inflation’s eroding powers act as a reminder of why it’s important to invest or save with a decent return in mind.

Money illusion?

Investors should be wary of falling prey to what the American economist Irving Fisher called “the money illusion”. The theory states that the average person tends to view their wealth and income in nominal terms instead of real terms, which is ultimately what we should really care about.

Purchasing power can change if the price of goods increases/decreases, or if inflation increases/decreases. A higher real income means a higher purchasing power since real income refers to the income adjusted for inflation.

Nominal interest rates in the UK are very attractive but, as shown in the graph below, the differential between nominal interest rates and the rate of inflation in the UK (i.e. the real return on cash) has fallen to its lowest level in years.

Real UK interest rates, 1987-2023

Source: Bloomberg, 13 June 2023

Conclusion: The real return on cash is as unattractive as it has been for decades, which means your purchasing power is at risk of erosion.

Time in the market and not timing the market

During periods of pronounced downward volatility it becomes very tempting to exit the market in an attempt to ‘reduce risk’. This can often be the worst time to do so, for several reasons.

One being that future returns are often more attractive once markets have fallen. A second reason is that this decision relies on re-entering the market at the right time. Research has shown that the average investor typically waits too long to do so.

The best days for markets tend to follow the worst days. As such, even if you think you can avoid the worst, you are probably likely to miss out on the best too.

The chart below shows that staying invested in global equities over the past thirty years, could have delivered a potential return more than four times greater than that of an investor who missed the best 25 days during the same period.

The Reward of Staying Invested

Source: Quilter Investors as at 30th June 2023. Total return in pounds sterling over a period 30th June 1993 2023. Based on an initial investment of £10,000 into the MSCI All Country World Index


Another example is an investor in the S&P 500 who shifted to cash after the first 25% decline during the Global Financial Crisis. They would find their portfolio still underwater today. This compares with breaking even in mid-2013, 4.8 years later, if they had remained invested in the stock market.

Conclusion: Time in the market is usually more successful than trying to time the market. Keeping your money invested means you can benefit from any upsides or bounces. Missing just a few good days can significantly reduce how much your investment grows.

Remain committed to your medium to long term plan

The chart below shows that over the medium to long term, there is an upward trend of returns from equities and bonds, despite short term volatility caused by major events. In fact, an investment into global equities could have grown by more than 1020% over the past 30 years.


Past performance should not be used as a guide for future returns, but one of the biggest mistakes in investing is to think that ‘it is different this time.’ Investors may look at global financial markets now and feel concern about the volatility seen in recent years. There certainly are risks but our own view is that the best antidote to this is diversification.

Conclusion: Don’t let short-term blips distract you from your medium to long term plan. Investing over the longer term (five years or more) are more likely to be successful.

Speak to an expert about your investments

As always, if you have any questions about your own personal finances do not hesitate to get in contact with your adviser. Alternatively, if you are new to financial planning and would like a free, no obligation consultation simply get in touch using the form below or call 01244 347 583 to speak to our team.


Why invest in markets when cash rates are so high? – This article is not personal advice. The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Source: Quilter Investors, Bloomberg, Investco

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