7IM Short Thoughts: Consistent companies vs. crazy current accounts

Video

Chris Justham, Managing Director, Intermediary Solutions19 May 2023

When interest rates go up, there's often a flurry of people asking if they should move to cash. This is often because one of the BIG appeals of cash is that it feels reliable. But if you dig a little deeper into this thinking, this is only true in the very short term.

All is revealed in our latest Short Thoughts video.

Transcript

So another interest rate rise from the Bank of England the other day. And we've got a really simple equation here, and that is, when there's another interest rate rise, we get more phone calls and more questions from people asking whether or not they should sell their investments and move to cash. And when you think about it logically, you can understand why. Because people want reliability and over a short term, it feels like something you understand and is stable, doesn't it?

But cash isn't as stable when you look over the years and decades. And if you zoom out and you look at the return that you might get, for example, on your bank account using base rate as your proxy, if you like, and that is a range between 0.1% and 14%. That’s a huge swing that is really, really volatile.

Now, perversely, let's compare it with equities. Not what you would normally look to compare against cash, granted, but your dividend yield, if you like, that income that you expect from companies, you invest in the range of returns you expect over the same time period have been between around 2% and 7%, about half the range I just mentioned in cash.

But when you think about it logically, it also makes sense and that is that companies hate having to cut their dividend. It's a key metric of a company's health, its stability and its reliability. So of course, it's the last thing they want to do is cut their dividend. So if I zoom out, then to that first question that I posed at the beginning.

When people are asking about whether or not they should sell their investments and go to cash. My question back would be: ‘What would you prefer? To have your money effectively run by the Bank of England, who quite happy, by the way, to cut rates in order to try and stimulate growth or to invest it with company or companies who are probably loathe to do so?’

Because what they're really looking to do is provide that stability and demonstrate that over the long term, they're good custodians of your capital because they want to grow.