Rising interest rates have created new choices for UK investors. It’s now possible to earn a 5% return on cash, risk free.
Recent data from the Hargreaves Lansdown (LON:HL.) website suggests to me that many of the firm’s investment clients are embracing this opportunity. Nearly 15% of the cash invested in individual securities (not funds) by HL clients last week was used to buy UK government bonds. From what I can see, these typically offer a yield-to-maturity of about 5%.
Hargreaves has a market share of about 40% in the UK, so I reckon this is probably a reasonable barometer of how private investors with share dealing accounts are allocating their cash.
In addition to this, there are plenty of cash savings accounts on offer at the moment offering 5% interest, backed by FSCS guarantees.
It’s not too hard to see why investors are happy to accept a capped upside in exchange for protection from losses.
Many of the small-cap and mid-cap stocks favoured by private investors have performed badly over the last couple of years, with the AIM market down nearly 40%:
With the economic outlook remaining uncertain, I can see the temptation to lock in a guaranteed return.
This approach probably makes sense for anyone who expects to withdraw cash from their investments in the near future. The short-term outlook for share prices is always uncertain.
But for investors like me with a focus on long-term returns, I think the cost of staying out of equities looks too high.
With valuations down almost across the board, I can see plenty of buying opportunities. I’m continuing to buy UK shares and have no intention of switching to cash.
Why buy UK shares?
There are several reasons for my continued focus on equities.
First of all, a 5% return isn’t enough to beat inflation, which remains over 7%. So saving in cash may still mean accepting an annual loss, in real terms.
More importantly, history tells me that it’s possible to do much better than 5% from shares.
Since 1900, UK shares have delivered an average annual return of 9.1% per year, according to the 2023 edition of the Credit Suisse Global Investment Returns Yearbook. That’s equivalent…
