Should you put your money in cash or equities?

I’m old enough to remember when you could get 10% on a cash savings account. Yes, that’s right. 10%. It’s not a typo. I had it on my Woolwich savings account in the late 1990s/early 2000s.

With interest rates languishing at ‘emergency’ levels for a decade or more, I never thought I’d see that kind of level again. But with interest rates now rising significantly, cash is starting to look interesting, especially for low-risk investors or those that need their money within a year or two.

A quick search on shows you can get up to 2.55% on an easy access account or up to 5% if you’re happy to lock it away for two years*.

Is cash the safest option?

With all the volatility in equity and bond markets it would be easy to conclude that cash would be the way to go now and forget about investing. But that could be a mistake.

While cash is still safer – up to £85,000 per person is protected should your bank go bust – it will still lose value in real terms if inflation is higher than the rate of interest you earn.

Other assets can also provide capital growth as well as income over the longer term.

When capital returns can pay (extra) dividends

In a recent video interview, Kevin Murphy, co-manager of Schroder Income fund, explained why capital returns can help boost your income over the longer term.

“Let’s say you invest £100 in your building society account earning 5%, you’ll gain £5 a year interest,” he said. “Stocks today yield just less than 3.5%. So, if you invest £100 in a stock, your dividend return will be £3.50, which is clearly less than the £5 interest.

“But when you invest in a share, you get something that you can’t get when you put money into a bank account, and that’s the potential of capital growth.

“To give you a real-life example, when the Schroder Income fund was launched in 1988, it’s yield was about 3.5% and, 34 years later, its yield is still about 3.5%. But because of the growth in capital, it’s 3.5% of a very much larger number.

“So, if you invested £100 at the dawn of the fund, your dividend would’ve been £3.50 a year, but because of the growth in the capital part, that £100 invested will now be delivering £18 worth of dividends each year because the £100 has grown and the income has grown alongside it. And that’s something that simply can’t happen for money on deposit.

“But it’s very difficult to compare interest rates and dividend yields. They’re fundamentally different things, with different risk profiles and what is right for you depends entirely on your own personal circumstances.”

A balanced portfolio may pay over time

FundCalibre’s own James Yardley has also pointed out that a mixed balanced portfolio of 60% equities 40% bonds has beaten cash 73% of the time on a rolling five-year basis over the past 30 years**.

“Having looked at the data, the cumulative return of a balanced portfolio was 722% over 30 years compared to just 150% for cash**,” he said.

This period includes several stock market and bond market crashes including the tech bubble, global financial crisis and Covid.

“The best period for cash was during the dotcom bubble between 1997 and 2002 when it outperformed the balanced portfolio by 31%**,” he continued. “The best periods for the balanced portfolio were between 1992 and 1997, and 2011 and 2016 when it outperformed cash by 73% and 71% respectively**.

“Overall, you have been much better off being invested in the balanced portfolio versus cash over the longer term, as you would expect. Cash is obviously looking much more attractive at the moment with interest rates rising steeply, but other assets are re-pricing to reflect that. Hence the recent falls in equities, bonds and property which should now have higher future returns going forward.”

Investors looking to make the most of dividends and capital returns could consider the Elite Rated Murray Income Trust, Artemis Income, LF Montanaro European Income, or Jupiter Asian Income funds.

Research all Elite Rated UK Equity Income and Global Equity Income funds

Alternatively, FundCalibre has several Elite Rated multi-asset income funds that you could consider, including Aegon Diversified Monthly Income, Close Managed Income and Jupiter Merlin Income.

Research all Elite Rated Multi-Asset funds


*Source: moneysavingexpert, 18 October 2022
**Source: FE fundinfo, total returns in sterling, 30 September 1992 to 30 September


Photo by Towfiqu barbhuiya on Unsplash

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.