Sit tight on your share portfolio – it’s a better bet than cash

THE stock market brushed off the rate rise – seemingly because the economic world’s worst-kept secret had already been factored into share prices.

But investors worried about potential wobbles if interest rates continue to rise should sit tight. History shows that whatever happens, shares are usually a better bet than cash in the long run in beating the effects of inflation.

The case for the stock market versus cash is well proven.

Over the ten years to the end of last month, £1,000 invested in the FTSE All Share index would have grown to £1,800, compared to £1,142 in the average bank account.

Justin Urquhart Stewart, co-founder of Seven Investment Management, says: ‘With creeping inflation and interest on savings accounts still paltry, the old chestnut of how to generate a decent income remains.

‘For many, this means taking more risk by investing in the stock market. Funds are a useful way to access the long-term potential of shares and the more cautious might consider monthly investment to smooth out the ups and downs. Multi-asset funds can also be a useful way to diversify risk – why bet on a horse, when you can buy the race?

‘Most significantly, investing in funds allows investors to benefit from compounding – generating a return from both capital and income – which is key to long-term returns.’

Darius McDermott, boss of broker Chelsea Financial Services, points to banks as among the main winners from the rate rise because they will

now be able to make a bigger margin between the cash they take in as deposits and the money lent to borrowers.

Investors keen to cash in could consider a fund with a decent weighting in banks and financial firms such as Jupiter UK Special Situations (24 per cent financials); Man GLG Undervalued Assets (29 per cent); and R&M UK Equity Long Term Recovery (27 per cent). Laith Khalaf of broker Hargreaves Lansdown believes companies to benefit from higher interest rates include those with big pension deficits, such as Tesco.

He says: ‘Low interest rates have meant low bond yields and that has caused no end of problems for companies with large pension funds, because liabilities rise as interest rates fall.’ Investors should always be mindful of the tax traps of investing. There is capital gains tax to pay on investment gains over an annual allowance of £11,300. By investing via a taxfriendly Isa, investors can build wealth outside the taxman’s grasp. Everyone has an annual Isa allowance of £20,000 which can be split between cash, shares or ‘peer-to-peer’ investments.