Most of us wish to be wealthier tomorrow than we are today. Therefore, it is important that the money we put aside grows quicker than inflation destroys it.
As the figures below make clear the “safety” of cash and bonds is nothing but a mirage. Money you had in cash and bonds over the last 5 years is worth less today than it was when you put it in. You have become poorer not wealthier.
The value of the large companies around the world however has gone up by more than inflation – despite all the worlds’ woes – money you had there is worth more today over 1, 3 and 5 years. You have become wealthier.
Here is the cumulative growth of cash, bonds and large companies over the last 1, 2, 3 and 5 years:
Over the last year:
- Inflation = +3.95%
- Cash = +3.65%
- Govt Bonds = -2.7%
- Large companies = +15.8% (11.85% or 4x better than inflation)
Over the last 2 years (which include the 1-year figures above):
- Inflation = +15%
- Cash = +5%
- Govt Bonds = -11.3%
- Large companies = +3.3% (11.7% or 4.5x worse than inflation)
Over the last 3 years (which include the 1- and 2-year figures above)
- Inflation = +20.9%
- Cash = +5.2%
- Govt Bonds = -17.4%
- Large companies = +23.7% (2.8% better than inflation)
Over the last 5 years (which include the 1-, 2- and 3-year figures above):
- Inflation = +23.1%
- Cash = +7.6%
- Govt Bonds = -12.4%
- Large companies = +66.5% (43.4% or 2.9x better than inflation)
Has accepting the ups and downs of the stock market compensate you in the form of better returns?
I think so, and all you needed was patience.
- Cash returns are based on the NS&I Direct Saver instant access rate over the relevant period. which was 0.15% in 12/21 and is now 3.65%)
- Bond returns are based on SGLO – iShares Global Govt Bond UCITS ETF)
- Large company returns are based on VEVE – Vanguard FTSE Developed World UCITS ETF)
- Inflation is based on the ONS UK CPI figures.