New research shows that people who invest in the stock market earlier enjoy massively better returns.
The study, by Fidelity, reveals that if you put your money into a stocks and shares Individual Savings Account (ISA) 15 years ago, your gains would be almost double those experienced by individuals leaving money sat in cash over the same period.
Fidelity carried out analysis based on using the full ISA allowance invested in an index tracker fund which aimed to track the performance of the FTSE All Share and compared this to average cash savings rates over five, 10 and 15 years.
The analysis demonstrates what might be called a cash penalty, or the equity premium, if you spin it the other way round. This is the difference between what an investor might have earned if they left their savings in cash versus those that put their money into equities.
Fidelity’s research says stocks and shares investors would have banked up to an extra £20,174 over five years, £55,541 more over 10 years and £104,217 more over 15 years.
The conclusion is that investing in the stock market earlier is likely to mean meeting your financial goals sooner. That might be building up a deposit for a first home, paying school fees or saving for retirement.
A PLACE FOR CASH, AND CASH IN ITS PLACE
That said, experts at financial planning firm Informed Choice still see an important role for cash within a wider portfolio.
‘It’s usually recommended to hold a short-term cash emergency savings fund in order to cover essential expenditure for between three and six months,’ says Shelley McCarthy, a financial planning director at Informed Choice.
‘Cash is also often preferable to investments where there is a short time horizon for your financial goals, such as buying a property in the next few years. Because investments can go down as well as up in value, the certainty of cash is important where a known amount of money is required in the short-term.’
But in the long-run there is no contest between cash and equities. ‘For longer-term financial goals, including retirement planning, the buying power of cash will typically be eroded by price inflation over time,’ says McCarthy.
