With a particularly tumultuous start to 2025, you may feel nervous about investing your hard-earned dollars in the stock market. If you've got $10,000 sitting in the bank, you could be tempted to leave it there.
However, this could be highly detrimental to your long-term wealth.
A potentially costly decision
According to the 2024 Vanguard Index Chart, investing in cash has resulted in a compound annual growth rate (CAGR) of 4.2% for the past 30 years.
A $10,000 investment in cash in 1994 would be worth $34,552 by 2024. While this may seem like a respectable increase, it barely outpaces inflation. Since 1994, the Consumer Price Index (CPI), which measures inflation, has averaged a 2.7% increase each year.
Additionally, the current outlook for cash over the next 5 years looks even less appealing than the long-term average.
Earlier this month, the Reserve Bank of Australia lowered the official cash rate by 0.25% for the second time this year. The current cash rate is 3.85%. As of 28 May, Commonwealth Bank of Australia (ASX: CBA) offered an interest rate of 3.7% on 12-month term deposits. Several further rate cuts have also been projected for the remainder of 2025, which will place downward pressure on interest rates. This will make cash investments even more inferior.
By comparison, Australian shares have a significantly better 30-year track record. Over the past 30 years, they have increased at a CAGR of 9.1%.
With the S&P/ASX All Ordinaries Index (ASX: XAO) not far off its all-time high, investors may be less optimistic about forward returns. However, with the long-term gap between the return on cash and return on Australian shares so significant, investors are likely to do better investing in shares. This is especially true over a longer time frame.
But, just how costly?
Based on the long-term average, $10,000 cash invested in Australian shares today at a 9.1% CAGR would be worth $15,760.84 in 5 years.
If that same $10,000 stayed in the bank, it would be worth $12,336.63 based on the long-term average return on cash.
Which Australian shares to buy?
If you're looking to invest in Australian shares, you have several options. You can buy exchange-traded funds (ETFs) that mimic a particular index. For example, the BetaShares Australia 200 ETF (ASX: A200) tracks the 200 largest listed companies in Australia. The advantage of an index fund such as the A200 ETF is that it allows instant diversification in a single trade.
Alternatively, you can buy individual ASX stocks. This strategy comes with higher risk, but also the option for much higher returns. Commonwealth Bank, Pro Medicus Ltd (ASX: PME), and Aristocrat Leisure Ltd (ASX: ALL) have been among the standout performers in the ASX 200 over the past year. While stock picking requires substantially more time than ETF investing, picking the right companies could see your $10,000 worth significantly more in 5 years.
