Most UK personal savers believe that cash is much safer than stock market investment. They remember stock market crashes like the 1987 hurricane crash, the crash following the bursting of the dot.com bubble and the collapse in prices which followed the credit crunch.
However most UK personal savers are wrong. They are confusing short-term risk with long-term risk. It is true that, in the short term (up to five years), you could lose a lot of money by investing in equities. If you had invested at the peak of the UK market at the end of 1999, you would have lost a packet in the short term. But, as most of us are hopefully on the planet for the long term, we should be focusing on long-term risk when it comes to saving (unless saving for a short-term event such as a wedding).
For all periods from ten years upwards, UK equities have delivered higher returns than any other non-physical UK asset class. Indeed, over the last ten years, cash has actually delivered a negative real return.
As I explain in my new book, 7 Successful Stock Market Strategies, even a simple buy and hold strategy for the FTSE 100 index has delivered an average annual return of 9.2%, net of the UK basic rate of tax, from the start of 1984 to the end of September 2014. This return includes reinvested dividends. The comparative long-term annual return from investment in the FTSE 250 index (from the start of 1986, when the index started, to the end of September 2014) has been even higher, at 11.2%.
For investment, my definition of risk is that of achieving a poor long-term return. On that basis, cash is a very high-risk long-term investment. I cover in my book a number of techniques by which you can minimise the risk and enhance the returns of long-term UK equity investment:
- Invest in a UK index tracker fund, rather than risky individual shares (just ask investors in Tesco or BP).
- Invest in a cost-effective index tracker fund. This will probably not be the fund which has the lowest quoted annual charge, since index tracking accuracy and hidden charges have to be taken into account.
- Buy when the index is cheap and sell when it is expensive. I describe a valuation system with a good track record of achieving this aim. For example, this system would have prevented you from investing at the top of the market at the end of 1999.
- Exit the market when panic has set in, to avoid the worst impact of market crashes. I describe a simple market momentum system which would have cushioned you against the full impact of the credit crunch crash.
The current era of artificially low cash interest rates makes UK equities an even more attractive long-term investment proposition. Don’t take the risk of leaving your money in cash.