Why invest at all when fixed-rate savings account are so high? [6-month "update"]

[david_thesalmst]

Preaching to the choir here, but always good to have the hard numbers.

In the past year or so, we had a lot of posts in /r/UKPersonalFinance asking why even risk investments when fixed-rate savings were paying 6%+ per year.

Well, it's been six months so I thought why not take a look at the relative performance over that period for some common markers, keeping in mind inflation is now at ~4%:

• 12-month 6% fixed savings account: +3%
• Vanguard Global All-Cap: +9.4%
• VWRP: +9.4%
• HSBC FTSE ALL WORLD INDEX CLASS C: +9.4%
• S&P500: +12.5%
• FTSE100: -0.60% (lol)

So, even if the market stagnated for the next 6 months, and taking into account fees, any of the commonly recommended products will still have comfortably outperformed even the highest fixed-rate savings account.

Obviously there might be a crash in the next 6 months, and all us investors will look stupid! But we might also see another 5+% rise and have outperformed those savings accounts by ~10%.

The point being: going with a high-interest savings account over the market just because the number looks big, is a type of timing the market, and a fool's game.

 

[resjudicata]

@david_thesalmst Why invest in all of those if you could have bought Nvidia not long ago and be up like 100% now? Ah wait, it's very easy to look back in history and make the judgment retrospectively. And the answer is very easy, fixed rate is risk free

 

[michelle99]

@resjudicata That’s it really. The market could boom for whatever reason and we’d have another post about how interest rates were not as good as we thought since the market has grown 25%. Or the opposite, and that’s the risk.

 

[chrisb1984]

@michelle99 With risk free investments you’re also barely beating inflation. The goal of investing is to beat inflation by having a globally diversified portfolio.

One of the biggest downsides of fixed rate savings it is subject to income tax once you go over the threshold. Granted you can put in an ISA.

To me the biggest benefit is the amount of tax I pay, 40-45 % income tax on savings vs 20% on capital gains.

 

[dramedywriter]

@chrisb1984 you can also pay tax on investments though. I'm not arguing for savings accounts, but the tax free element for both sides is a completely separate variable

 

[michelle99]

@dramedywriter If you invest through a S&S ISA it’s still tax free. You do just have the ISA limit each year but I’d be happy getting halfway to that limit at the minute

 

[samanddad3201]

@dramedywriter You are taxed on savings...

Higher rate tax payers get £500/yr of personal savings allowance which is about £10K in savings now.

 

[jesussa]

@resjudicata Yeah these kinds of posts are pointless under a one year timeframe. Need to look at 10 years or more, which of course the share market will win easy in most cases.

 

[cpf]

@resjudicata Fixed rate/cash investing is not risk free. It's low risk, with the key risk being inflation erosion over the long term.

 

[victory123]

@cpf As a comparison to all other methods though it's the least risky way of holding money. It's touted as risk free because you can't really guarantee any better.

 

[cpf]

@victory123 I agree with you.

I disagree holding cash is risk free. The tradeoff of security in a known return is less risky than investing in volatile stock markets. shrug

Just because something is touted as risk free doesn't mean it is - and we in a personal finance sub should be aware of the risks in any investment decision.

 

[victory123]

@cpf I think this is more a discussion on semantics. It just doesn't seem like a particularly helpful clarification when literally every other option you could choose is higher risk.

I suppose stating we should start saying that they are "lowest risk", but I'm not sure it really changes how people would construe the meaning of risk.

 

[julie121]

@victory123 This depends entirely on what risk you're talking about. The quantifiable risk of a single asset or the risk to your entire portfolio over its entire lifetime? If the latter, then volatility is just one aspect of risk. Over long time periods, interest rates are highly correlated with stock market returns, that is another massive risk that isn't talked about enough. At that point investing in bonds or holding cash is even riskier than stocks because of the smaller returns they general bring which is eaten up by inflation.

 

[roryrichards]

@resjudicata Fixed rate is risk free, but you can't really compare a all world index fund with a single stock in terms of returns like that

 

[resjudicata]

@roryrichards 2008 enters the chat, took 5* years to recover SP500

 

[mommytobof3]

@resjudicata You're out by 5 years here, it took until Feb 2013 to recover from its highs in 2008.

 

[inchrist1]

@mommytobof3 Only matter if you were close to retirement or retired and fully invested in the S&p 500. If you continued to dca into it from 2008 you will be laughing all the way to the bank.

 

[julie121]

@roryrichards You can compare absolutely anything you want. Like you said, fixed rate is risk free so how can that be compared to risky assets like equities surely?

The equity risk premium on paper means over a long timeframe stocks will outperform risk free investments every time, of course over smaller timeframes and at specific moments in time risk free assets might outperform stocks but that kind of thinking is pointless.

 

[roryrichards]

@julie121 The premise of the post is that people don't see the point in investing in Vanguard Global All Cap through a SIPP when fixed rate savings are paying 6%.

Why invest when fixed savings are paying 6%+

My wife having been saving for a home deposit for years but for a number of reasons we're not going to buy property anytime soon so that leaves the question of what to do with the money that we don't need for the long term.

I hold Vanguard Global All Cap through an SIPP. The returns have been meh and it's of course flucterated a lot.

There are now 6% interest savings accounts so I find myself tempted to just put the lot in there.

Investing the money would allow us to pay less tax because we could use stock and shares ISAs but is that really worth the trade off of increased volatility and uncertain returns?

...

The equity risk premium on paper means over a long timeframe stocks will outperform risk free investments every time, of course over smaller timeframes and at specific moments in time risk free assets might outperform stocks but that kind of thinking is pointless.

The timeframe outlined in the op was 'a long time'.

 

[gusbus]

@resjudicata Only if you need the money in the very very short term should this matter tho, if it's for long term savings OP is spot on, this seems to be a very british sentiment, they're appropriately risk vs reward weighted

It's not going into a casino and betting your house on red