Great News for Share Investors
Right now, there's a sweet opportunity to snag some attractive term deposit rates, but let's talk about the bigger picture. Equities, that fancy word for stocks, are likely to outperform plain old cash in the long run.
Let me explain...
Down under in Australia, the inflation rate is dropping. Why? Well, because interest rates are up, and people aren't spending as much. That's generally good news for the economy. But don't pop the champagne just yet. It might take another year, at least, to get inflation back in line with the Reserve Bank's target of 2-3%.
The Reserve Bank of Australia (RBA) is keeping interest rates steady for now, but we believe that inflation will stick around. So, brace yourselves; the RBA might hike up interest rates once or twice more to get things back on track.
Sure, the lower July consumer price index reading is a step in the right direction, but don't expect interest rates to come down until the RBA is absolutely sure that inflation will behave itself soon. Unfortunately, that means borrowers might be a little disappointed.
But, here's the silver lining. Over the past 16 months or so, those higher interest rates have made cash investments, like term deposits, pretty darn attractive. In fact, you can lock in some juicy 12-month fixed yield returns, topping 5%, with various financial institutions. That's not too far off from what the whole Australian stock market has returned this year.
Now, you might be thinking, "Why risk it in the stock market when cash is so tempting?" Well, hold your horses. It depends on how long you plan to invest and how much risk you're comfortable with.
Cash is typically there to earn you a bit of return while keeping your money handy for daily expenses or emergencies. It's a safe bet, unlike the rollercoaster ride of stocks.
Vanguard's latest investment chart for 2023 shows that cash investments have averaged a 4.2% return over the last 30 years. To put it in perspective, if you parked $10,000 in cash on July 1, 1993, and left it there for three decades, you'd be looking at $34,737 by June 30, 2023.
But, and here's the twist, even with all the ups and downs in the stock market—think Dot.com crash, Global Financial Crisis, and the COVID-19 pandemic—equities have scored bigger long-term returns. The S&P 500 Total Return Index, representing the top 500 U.S. companies, dished out an average annual return of 10%. So, that $10,000 invested in 1993 would have ballooned to $176,155 by 2023. Not bad, right?
And if you ventured into international shares over the same 30-year stretch, that $10,000 would be sitting pretty at $87,584, thanks to the MSCI World ex-Australia Net Total Return Index's 7.5% annual return.
If you stuck with the Australian share market, as tracked by the S&P/ASX All Ordinaries Total Return Index, that same $10,000 would have grown to $138,778, with a solid 9.2% annual return over the long haul.
Now, history buffs will tell you that there were times when cash outperformed stocks, usually when inflation and interest rates were through the roof—think back to the '70s, '80s, and even 2022. But Vanguard thinks those days won't be making a comeback.
In fact, they're betting on equities to outshine cash in the long run. Over the next 10 years, they're estimating global stocks will deliver 5-7% annual returns, while cash might only manage 3-4% annually.
So, you might be tempted to stash your cash away for now, enjoying those higher interest rates, and wait for the perfect moment to jump back into stocks. But here's the catch: trying to time the market is a lot like trying to predict the weather—it's tricky, and you might miss out on some sunny days.
The smart move? Have a solid long-term investment plan and set your assets up accordingly. Remember, it's about time in the market, not timing the market. So, whether you're team cash or team stocks, make your choice wisely and stick to your game plan.
What's that I hear? You think shares are complicated and don't know where to start? Well you might want to consider a foolproof way to build your wealth by using dollar cost averaging.
If you would like to discuss how to get started with shares, please arrange a chat with one of our expert team members.