Saving vs investing

bobthebleeper

We're often told that it's wise to invest long-term in the stock market rather than put all one's money in cash, because the long-term expected return is much greater. That makes sense; when investing in say an instant-access account one is "buying certainty" by accepting a lower return than the bank can get by investing or e.g. lending to other people. However, at least at present, this difference must be very small, because the highest instant-access interest account listed on MSE pays just over 5.1%, and the cheapest loan is just under 5.9%. So, for the banks (TSB, Tesco) offering the 5.9% rate, then even if no-one defaulted and there were no other costs, the maximum return is 5.9%. That must surely be more than they would expect to get by investing on the stock market, otherwise they would just do that. So this means that the difference between what (even a bank) could earn by investing overthe stock market can only be at most 0.8% more than (even a mere citizen) could get by opening an instant access account with another bank. In reality the difference will be even smaller, because the bank can probably invest more cheaply (lower overall costs) than I can, and some people who take out the loans will do a runner.

So, either the benefit of investing rather than saving is quite small, or I'm missing something (for example the instant access accounts will sneakily reduce their interest rate and hope the savers don't notice/can't be thered to switch).

Can someone enlighten me?

jaypers

For a Bank, Retail Banking and Investment Banking are 2 completely different types of business and also now ring fenced from each other. Investment Banking carries with it the chances of high returns but also high risk. Retail Banking is tight margins and a much lower risk. There is no comparison really and not all Banks have an Investment Banking arm. Conversely, there are specialist Investment Banks that don’t get involved in Retail Banking. You mention TSB and Tesco who are Retail only. 

boingy

You're missing that the banks like the certainty of the income too, just like people who put money into savings accounts.

Hoenir

Banks use fractional reserve banking to leverage their balance sheets.  Banking fundamentally changed in the early 70's. Back then loans to deposits was a ratio close to 1:1. At the time of the GFC in 2008.  Barclays for example was around 72:1. Hence the need for QE to provide the liquidity while banks delveraged their balance sheets. 

jimjames

bobthebleeper said:

 So, for the banks (TSB, Tesco) offering the 5.9% rate, then even if no-one defaulted and there were no other costs, the maximum return is 5.9%. That must surely be more than they would expect to get by investing on the stock market, otherwise they would just do that.

Can someone enlighten me?

Except it's not the case, returns are higher than that but banks need guaranteed returns to be able to pay savers. 

born_again

Do not judge a bank on savings interest rates V loan rates.
The money is made on Mortgages.

Albermarle

So, either the benefit of investing rather than saving is quite small, or I'm missing something (for example the instant access accounts will sneakily reduce their interest rate and hope the savers don't notice/can't be thered to switch).

Disregarding bank strategy ( which has been explained above), it is true for the individual they can currently earn a higher interest rate than inflation, in some savings accounts. Compared to the recent past this is a quite unusual situation, which may or may not last for a while in future. So the balance between saving and investing has shifted a little.

However in the long term ( over 10,20, 30 years etc ) it would still seem very likely that investing ( if done wisely) will bring a better return than saving.

Prism

Basically banks can create money to loan it out but they can't do that to invest in the stock market. So lets say that a bank had £1000 on their books which they had borrowed at 5%, they could loan that £1000 pounds to multiple different individuals and businesses at 5.9% each. That is a lot of 0.9%'s. They need to keep a certain amount in reserves but nowhere near the amount that they loan out.

allegro120

bobthebleeper said:

We're often told that it's wise to invest long-term in the stock market rather than put all one's money in cash, because the long-term expected return is much greater. That makes sense; when investing in say an instant-access account one is "buying certainty" by accepting a lower return than the bank can get by investing or e.g. lending to other people. However, at least at present, this difference must be very small, because the highest instant-access interest account listed on MSE pays just over 5.1%, and the cheapest loan is just under 5.9%. So, for the banks (TSB, Tesco) offering the 5.9% rate, then even if no-one defaulted and there were no other costs, the maximum return is 5.9%. That must surely be more than they would expect to get by investing on the stock market, otherwise they would just do that. So this means that the difference between what (even a bank) could earn by investing overthe stock market can only be at most 0.8% more than (even a mere citizen) could get by opening an instant access account with another bank. In reality the difference will be even smaller, because the bank can probably invest more cheaply (lower overall costs) than I can, and some people who take out the loans will do a runner.

So, either the benefit of investing rather than saving is quite small, or I'm missing something (for example the instant access accounts will sneakily reduce their interest rate and hope the savers don't notice/can't be thered to switch).

Can someone enlighten me?

Investing - expected return is much greater.  The key word is "expected". You can expect both, return and loss. and you don't know how much you are going to earn or loose.
Saving - you know what interest your money will earn and you don't expect any capital loss.

coyrls

Albermarle said:

So, either the benefit of investing rather than saving is quite small, or I'm missing something (for example the instant access accounts will sneakily reduce their interest rate and hope the savers don't notice/can't be thered to switch).

Disregarding bank strategy ( which has been explained above), it is true for the individual they can currently earn a higher interest rate than inflation, in some savings accounts. Compared to the recent past this is a quite unusual situation, which may or may not last for a while in future. So the balance between saving and investing has shifted a little.

I am not sure that's true, I think you might be forgetting how low inflation has been in the "recent past", I set up a ladder of fixed rate savings account in 2016 and I have beaten or more or less matched inflation every year from 2017 to 2022.  The only year where I was significantly under inflation (CPI) was 2023 (a 5 year fixed account that matured in February 2023).

Albermarle

coyrls said:

Albermarle said:

So, either the benefit of investing rather than saving is quite small, or I'm missing something (for example the instant access accounts will sneakily reduce their interest rate and hope the savers don't notice/can't be thered to switch).

Disregarding bank strategy ( which has been explained above), it is true for the individual they can currently earn a higher interest rate than inflation, in some savings accounts. Compared to the recent past this is a quite unusual situation, which may or may not last for a while in future. So the balance between saving and investing has shifted a little.

I am not sure that's true, I think you might be forgetting how low inflation has been in the "recent past", I set up a ladder of fixed rate savings account in 2016 and I have beaten or more or less matched inflation every year from 2017 to 2022.  The only year where I was significantly under inflation (CPI) was 2023 (a 5 year fixed account that matured in February 2023).

I think you have been cleverer than average in organising your savings accounts. AFAIK the historical data uses typical easy access rates. Also the last decade was abnormal with very low interest rates, and very low inflation.

Statistically you are right that there have been other periods where cash has just beaten inflation, but has still  lagged badly compared to investing.