Sponsored content: Embracing the Stock Market, Why Higher Interest Rates Won't Deter Smart Investors
By Joseph Green, Financial Planning Associate
In a world where cash deposits offer enticing interest rates, some investors may question the wisdom of investing in stocks. Why venture into the stock market when bank accounts seem to promise higher returns with safety? Despite the allure of higher interest rates, astute investors recognise that the stock market remains an attractive avenue for wealth growth and capital appreciation. In this article, we'll delve into why investing in the stock market still makes sense, backed by insightful quotes and key points.
1. Potential for Superior Returns
Historically, the stock market has outperformed cash deposits. According to analysis on the stock market by Barclays, over two-year periods, UK shares outperformed cash 69% of the time[1]. This figure increases to 91% over ten years. For those seeking long-term growth and willing to tolerate some risk, the stock market offers a more promising return on investments than short term cash deposits.
2. Diversification and Risk Management
Diversification can help cushion your portfolio against market downturns. While cash deposits may be less volatile, they offer limited long term growth potential. Diversifying your portfolio in different sectors, different companies both large and small and investing globally in different geographical areas manages risk and gives the potential for long term steady growth.
3. Inflation Protection
Inflation erodes the value of cash deposits over time. In July 2023 the UK's inflation, as measured by CPI was 6.8%. In contrast, the stock market has consistently outpaced inflation, safeguarding the purchasing power of your investments. £1,000 invested in the FTSE 250 index of company shares in 1990 was worth £18,827 in 2022. A shareholder annualised return of 10.3% [2].
S&P 500 Returns vs. Highest US Inflation Years (1928-2021)
- Average Inflation: 8.7%
- Average S&P 500 Return: 9.4%
In seventeen high-inflation years, the S&P 500, which track the largest 500 companies in the US, delivered an average return of 9.4%, surpassing the inflation average. This highlights the stock market's effectiveness as an inflation hedge.
While higher interest rates on cash deposits may be tempting, smart investors recognise the long-term benefits of the stock market. With potential for superior returns, portfolio diversification, and protection against inflation, the stock market remains a formidable platform for wealth-building. Remember that all investments carry risks, so thorough research or professional guidance is essential. By balancing risk and reward, investors can capitalise on the opportunities the stock market offers and work toward their financial goals. Fortune favours the bold, informed, and patient investor.
[1] Source: 2023 Equity Gilt Study | Barclays CIB
[2] Source: FTSE Russell 250 celebrates 30th anniversary
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