There\u2019s something reassuring about money in the bank. It\u2019s easily accessible; stowed away in a trusted institution; and, when you make a withdrawal, it\u2019s tangible. No wonder then that in times of uncertainty people tend to favour cash, believing it will protect their savings.
By contrast, investors often only feel comfortable investing in stocks, shares, and funds when the outlook feels relatively certain. As Brexit draws closer and signs of fragility emerge in the world economy, such as Turkey\u2019s recent troubles, it could be tempting to stockpile cash in the bank.
Unfortunately, there\u2019s no such thing as risk-free investing \u2013 even if you do place your money in a bank account \u2013 and the simple reason for that is inflation.
Inflation quantifies the increase or decrease in the cost of living, measured by movements in the consumer price index. Generally speaking, it\u2019s given comparatively little attention, despite its clear impact on your shopping basket.
You won\u2019t see the effects of inflation published on your bank statement, for instance. All you see is your cash and any interest gained, which doesn\u2019t make any adjustment for what the balance is worth in real terms.
Yet, the effects of inflation can be damaging, gradually eroding the value of your money. A more accurate bank statement would illustrate how much you have \u2018lost\u2019 through the decline in your savings\u2019 purchasing power.
To take an example, let\u2019s say you had \u00a310,000 in cash 10 years ago. According to our research, the actual return on that figure, taking inflation into account, has averaged negative 1.80% per year over the past decade.
Even removing the effects of tax, that\u2019s the equivalent of losing \u00a3180 annually at the outset. And, after 10 years, the total losses in terms of spending power would have totalled \u00a31,663. You\u2019re then left with a cash sum with a real value of just \u00a38,337 \u2013 a 17% decline.
This is because inflation has pushed up the cost of goods and services in the real world while the interest paid on your cash has failed to keep up. And, of course, any tax you need to pay on your interest would reduce the returns still further.
The Office for National Statistics recently announced that inflation had risen for the first time since November 2017, to 2.5% in July. If it stays at that level for a decade, it would turn \u00a310,000 today to the equivalent of just \u00a37,763.30, reducing the value of your money by almost a quarter.
With inflation far outpacing the Bank of England\u2019s base interest rate of 0.75%, savers are losing money every day. There are numerous ways of protecting against the erosive effects of inflation, but none have been as consistent as investing in stocks and shares.
Naturally, even in the most cautious portfolio there is a risk to capital and, if stock markets fall, you could end up with less than you put in. But, investing in equities should be viewed as a five-year commitment at the very least, which increases the likelihood of a positive return after inflation.
Broadly speaking, the opposite is true with cash: the longer it is in the bank, the more likely you are to have a negative real return because of inflation. In fact, over the past 10 years after-inflation returns on shares have outperformed the equivalent on cash by 74%.
Money in the bank may feel safe in times of uncertainty \u2013 more than \u00a3200 billion languishing in cash ISAs suggests a lot of people follow that mantra. But, in reality, it\u2019s merely eroding savings and people\u2019s purchasing power.
ENDS
The value of investments can fall and you may get back less than you invested
Past performance is not a guide to future performance
The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd<\/p>
<\/p>","protected":false},"excerpt":{"rendered":"
Cash is not king \u2013 how inflation erodes your savings<\/p>\n","protected":false},"author":97,"featured_media":0,"template":"","meta":{"_acf_changed":false,"rbc_url_alias":"","footnotes":""},"tags":[],"rbcwm_news_category":[],"class_list":["post-2315","rbcwm_news","type-rbcwm_news","status-publish","hentry"],"acf":[],"yoast_head":"\n