Should I invest if interest rates are rising?

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With interest rates on cash at their highest levels in over a decade, what role do equities play in a diversified portfolio?


1 August 2023 | 3 minute read

High inflation has seen interest rates on cash increase over the past year to the highest levels in well over a decade. You might be wondering whether this is a good time to move your money from higher-risk asset classes, such as equities, into a cash savings account. While rates on cash certainly look attractive, ensuring you have a diversified portfolio that suits your needs and attitude to risk remains as important as ever.

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Knowing how to navigate the current economic environment isn’t easy, as much will depend on your individual circumstances. A financial adviser can guide you through these uncertain times and help you understand what’s right for you. In the meantime, here are some of the factors to consider when you’re deciding on the best home for your money.

Short vs long-term goals

Regardless of whether interest rates are high or low, cash is the best option when it comes to your emergency fund, short-term goals, and planned one-off expenses. The last thing you want is for your money to drop in value just before you need to access it. Rising interest rates mean it’s now possible to get a decent return on easy-access savings accounts. If you haven’t already done so, it’s well worth shopping around for a better rate for your existing savings.

For longer-term savings, some fixed-term savings accounts are currently offering rates of over 5.5%1. This is much more attractive than we’ve seen for many years. It’s easy to assume that cash is the better option, but it’s important to take a long-term view. If we look at the performance of cash and equities over the last couple of decades, equities have outperformed, albeit with volatility along the way.

The chart below shows that if you put £100 in a cash savings account in January 1976, it would have increased in value to £1582 by May 2023 after adjusting for inflation. In contrast, if you had invested £100 in the MSCI World index, it would have grown to £1,520 on a ‘total real return’ basis (combining share price changes and dividend income, and adjusting for inflation). While you can’t rely on past performance, it’s worth noting that this period saw some major economic events, including the stagflation of the 1970s, the bursting of the dot-com bubble, the global financial crisis, and the Covid-19 pandemic.

Cash and equities – real returns since 1976

Source: RBC Brewin Dolphin / Refinitiv Datastream. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance.

Diversifying your portfolio

Stock markets tend to go through cycles. Sometimes share prices rise and sometimes they fall; sometimes the stock market will outperform cash, and sometimes it won’t. Trying to predict the best time to buy or sell stocks is nigh on impossible and fraught with risk. A much better strategy is to stay invested for the long term and ensure you have a diversified portfolio. By holding a mix of equities and cash, you’ll have the chance to benefit from stock market rallies while also having a buffer to dampen the impact of market downturns. Bonds and property may also play a role in your portfolio, and you could diversify further by investing in different sectors and regions.

A financial adviser can help you build a diversified portfolio that works hard to preserve your money’s purchasing power and grow your investments over the long term.

Investing tax efficiently

Holding a mix of asset classes across different savings and investment wrappers also enables you to make the most of the tax allowances available to you. Assuming you’ve used up your personal allowance, you can earn up to £1,000 of tax-free interest as a basic-rate taxpayer. This reduces to £500 for higher-rate taxpayers and is zero for additional-rate taxpayers.

You can save up to £20,000 into ISAs each year to benefit from tax-efficient income/interest and investment growth. You can split your £20,000 allowance across cash ISAs and Investment ISAs. If you hold investments outside an ISA, you can utilise the capital gains tax (CGT) exemption, which enables you to make tax-free profits of up to £6,000 in the 2023/24 tax year (reducing to £3,000 in 2024/25).

If you’re under age 75, contributing to a pension may be even more beneficial than investing in an ISA. Not only is there no income tax or CGT to pay on investment returns, but contributions attract income tax relief at your marginal rate. Limits and restrictions apply, so always seek advice if you’re considering making a pension contribution. We can help you arrange your savings and investments as tax-efficiently as possible, so more of your money goes towards your goals.

Next steps

Understanding where to invest your money in the current economic environment isn’t straightforward, and that’s where getting some smart advice comes in. At RBC Brewin Dolphin, we can offer the right solution for you, whatever your needs and goals are. We’ll help you navigate different market cycles, mitigate against the impact of inflation, and build a robust investment portfolio that suits your individual circumstances. That way, you’ll feel confident you’re making the right decisions with your money.
Based on Bank of England base rate

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The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance.

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