One of the more pleasing aspects of the rapid rises in interest rates that we've all had to deal with over the past year or so is the return on interest-bearing cash investments. Until the start of 2022, interest rates were at a historic low of 0.1%. This meant that it was difficult to find a savings account or term deposit yielding anything over 1%.
Getting a 1% return on your money isn't exactly an exciting prospect. As a result, we saw large amounts of capital flowing into the share market chasing yield between 2020 and 2022.
But today, the picture is remarkably different. Earlier this month, the Reserve Bank of Australia (RBA) raised rates for the tenth consecutive month in a row. The cash rate now sits at 3.6%, well above the 0.1% it was at just over a year ago.
This means that cash investments are back to paying decent interest rates. In fact, today, you can nab yourself a term deposit that will pay you close to 5% per annum. That's more than the dividend yields of Woolworths Group Ltd (ASX: WOW), Telstra Group Ltd (ASX: TLS) and even Commonwealth Bank of Australia (ASX: CBA) right now.
But I'm still avoiding investing in cash today, beyond an emergency savings account, of course. Why? Because Warren Buffett told me so.
Buffett: Cash is trash
Well, not directly. But here is a quote on the merits of cash investments (or lack thereof) from an article Buffett once wrote:
Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky's advice: 'I skate to where the puck is going to be, not to where it has been.'
Buffett wrote that in 2008, in the midst of the global financial crisis. Since then, the flagship US S&P 500 Index (SP: .INX) has risen more than 330%. It was good advice then, and it remains good advice today.
Shares are volatile, no one can deny it. The past month alone has seen the S&P/ASX 200 Index (ASX: XJO) lose more than 5% of its value – a year's worth of term deposit returns. But this volatility is the price we pay for the outsized returns that ASX shares have given investors over a long period of time.
Let's take an exchange-traded fund (ETF) that tracks the ASX 200 Index, the iShares Core S&P/ASX 200 ETF (ASX: IOZ).
Over the ten years to 28 February, this ETF has returned an average of 7.72% per annum, including dividend returns. Compare that with cash, and we don't even have a contest. Even the highest interest rates in more than a decade don't touch the returns of shares.
So when you're tempted to give up the volatility of the share market for the 'safety' of cash, remember what Warren Buffett said.
