In recent times, savings rates have seen significant improvements, with fixed deals offering up to 6% and easy-access accounts providing 5% returns. This has led many individuals to contemplate whether they should divert some of their cash into savings rather than invest in the stock market. It is important, however, to understand the difference between long-term investments and short-term savings.
According to Jason Hollands, a director of Evelyn Partners, individuals seeking short-term gains, such as a 6% return in just one year, should avoid investing altogether. He states that investing in volatile financial markets over such a short period is extremely risky. Therefore, for those seeking a five-year fixed-rate bond, RCI Bank offers the best option with a rate of 5.8%, slightly below the rates for one and two-year deals.
For individuals concerned about exceeding the Personal Savings Allowance, Zopa is currently offering a five-year cash ISA with an interest rate of 5.26%, potentially resulting in a return of £6,000 by 2028. Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, explains that when interest rates rise, stock markets tend to be negatively affected as investors find less incentive to take on the risk associated with the stock market. She suggests exploring other corners of the market that offer opportunities for growth, such as the AI boom and specific segments of the pharmaceutical industry.
While some strategic and high-yield bond funds can offer returns above 6%, it is important to recognize that these come with greater risks than cash. The same is true for equity income funds; although they may offer yields above 6%, they are variable and not guaranteed. Hollands recommends considering short-dated corporate bond funds and infrastructure investment trusts as relatively low-risk options. He mentions the TwentyFour Absolute Return Credit Fund as an example of a fund that invests in bonds with strong credit ratings, many of which are due to mature within the next five years.
Additionally, exposure to infrastructure through listed investment companies can provide inflation-linked returns. These companies are invested in operational infrastructure projects under long-term contracts and often provide annual adjustments for inflation. Examples include HICL Infrastructure and International Public Partnerships. Despite their potential, it is worth noting that past performance does not guarantee future results.
Ultimately, when deciding between investing in the stock market or opting for cash savings, it is crucial to consider one’s goals and risk tolerance. Investing in the stock market offers the potential for higher returns but also comes with market fluctuations. On the other hand, savings accounts provide stability and guaranteed returns, making them more suitable for individuals with shorter investment horizons.
In a reader poll conducted by This Is Money, 35% of respondents chose fixed-rate savings accounts as their preferred investment option. However, it is important to note that the decision on where to invest should be based on personal circumstances and goals.
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