UK residents hold a staggering £2 trillion in savings - yet an question remains: why aren't we investing more?
In a recent analysis by asset management firm Janus Henderson, it has been revealed that the majority of UK savers are relying solely on variable rate accounts, a strategy that may not be ideal for long-term wealth accumulation.
According to Dan Howe, head of investment trusts at Janus Henderson, this reliance on cash savings could be detrimental to savers, as the real return on savings prior to April 2023 was actually negative due to inflation being lower than the interest rate. This is particularly concerning when one considers that the UK's GDP is currently around £2.8 trillion, making the savings equivalent to around 73% of the total UK economy.
The firm's analysis, which used data from the Bank of England, the Building Societies Association, and NS&I, also found that UK savers earned £58.6 billion in interest between January and September 2023. However, with inflation peaking at just over 11% in 2022, the value of money would halve in around six years at this rate.
On the other hand, investing sensibly in a diversified stock market index over a period of many years can result in significant returns. For example, in the same period (January to September 2023), the FTSE All-Share returned 9.9%, while the MSCI World returned 13.4%. Investing in UK equities, such as via the FTSE 100 or diversified global indices like the MSCI All-Country World Index, has historically provided higher returns than cash, typically around 6.3% nominal annual returns over the past 20 years, which translates to real returns of approximately 3.5% after inflation.
Many UK savers, however, don't know where to start when it comes to investing. A low-fee global tracker can be a good starting point for those who are unsure, as it mimics the returns of an index like the MSCI World or the FTSE All World.
Cultural differences could be a factor in the lower investment rate in the UK. Americans are more comfortable with risk than Brits, which is one reason for the transatlantic divide in investment. Only 23% of people in the UK have invested in the stock market, compared to almost two-thirds of people in the US.
Another reason for the preference for property in the UK is that it offers a sense of security and tangibility that investing in the stock market does not. However, as the analysis shows, relying solely on cash savings for long-term wealth goals may not provide the best returns, especially when inflation is factored in.
UK savers will suffer from further interest rate cuts expected next year, making the need for alternative investment strategies even more pressing. Balancing both strategies—holding some cash for safety and investing for growth—is considered prudent.
[1] Bank of England [2] Building Societies Association [3] NS&I [4] Janus Henderson analysis
- In light of the Janus Henderson analysis, it appears that investment trusts might offer a more viable strategy for long-term wealth accumulation compared to solely relying on variable rate accounts, especially considering the negative real return on savings due to inflation.
- The Janus Henderson analysis also reveals that UK savers could lose significant value of their money over time due to the high inflation rate, making it crucial to consider investments such as UK equities, index funds, and diversified global indices like the MSCI All-Country World Index for better returns.
- For those who are uncertain about investing, a low-fee global tracker that mimics the returns of an index, like the MSCI World or the FTSE All World, can be an excellent starting point in personal-finance.
- Cultural differences between the UK and other countries, such as the US, may explain the lower investment rates in the UK, but it's essential that UK savers reconsider their strategies, especially in the face of further interest rate cuts and rising inflation, as relying solely on cash savings may not provide the best returns for long-term wealth goals.
