You may have seen the headlines over the last week or so reporting on my new research into cash versus shares, stating the former beats the latter. In fact, the results are more nuanced.
For investments over five years beginning any date between 1 January 1995 and ending up to 1 January 2016, there was an almost six to four chance (57:43) that you would have done better in cash. The research also found there was about a one in four chance (24 per cent) that your investment would be less at the end than at the beginning.
For other investment periods – I looked at all time frames from one to 20 years – the results were equally surprising. Cash won more often than not over most of them, sometimes by an even bigger margin.
For those of you in a state of shock, let me administer some fresh air. Shares beat cash at 18 years and over the whole 21 years. The compound return on shares from 1995 to 2015 was 6 per cent, while on cash it was 5 per cent. A £10,000 investment on 1 January 1995 would make £6,000 more in shares than cash by 1 January 2016 – £34,100 versus £28,100. But that 1 per cent difference is a much narrower margin than is typically quoted for the so-called risk premium.
Last October I stuck my head above the parapet and tried to persuade people of the merits of cash – in its place, for the right client, at the right time and for the right duration. Good advisers understood what I was saying and some agreed with me. Of course, all good advisers are willing to humour the apparently eccentric choice of clients who want their money to be tucked away safely and boringly in cash rather than at risk in shares or other investments.
But many of you remained sceptical and made strong comments about just how wrong, daft, misguided and even dangerous I was to suggest cash could ever equal, never mind surpass, shares.
I am returning to it now because, in the nine months since that article appeared, I have obtained crucial new data, redone my calculations carefully and had them thoroughly checked by an actuary, an investment specialist, a data provider and a comparison website. All of them agree the new data is important, the calculations are correct and the outcomes interesting. One adviser who said last week he would “pull the whole thing apart” examined the original data and recently wrote to say: “As much as I hate to say it, I found that you were right”. Though, to be fair, he did have many reservations about what conclusions could be drawn.
The research compared the returns produced by a simple FTSE 100 tracker fund and active cash. Active cash is a simple idea. On day one you put your money into the best buy one-year deposit account. That guarantees you a known rate of interest fixed over one year. A year later you take the money out and put it into the best buy one-year account at that time. A year later you do the same again, and so on until the end of the investment period. It takes minimal effort – perhaps 20 minutes once a year – and no judgement at all, except deciding which interest rate is the highest.
I chose a FTSE 100 tracker because it represents the market and has the longest run of continuous data I could get. There are many other trackers but my criteria – longest data run and something an unadvised investor would have used in 1995 – indicated the FTSE 100. Morningstar provided data for me back to 1995 for the HSBC Retail tracker. Dividends are, of course, reinvested.
Cash data is more difficult to find. Moneyfacts was the first to document savings rates from 1988 in its monthly periodical. No data before 2007 is available in digital form. So Moneyfacts kindly allowed me to take down the data from the magazines in its archives. No one has collated that data before. This research is the first analysis of the returns on savings using best buy data. Others have used Bank of England averages, “typical” savings accounts or Treasury Bills, which are not cash at all.
All of them seriously underperform best buys. Today they show a return around 0.45 per cent, whereas best buy cash returns 1.45 per cent easy access or 1.66 per cent on one-year accounts. The other problem with many studies is that they ignore charges on shares investments. That exaggerates the return. I reckon those two errors understate cash and exaggerate shares by about 1.25 per cent in both directions.
Using real returns after charges on a FTSE 100 tracker and best buy cash, the research found that cash won a majority of times over all investment periods from five to 17 years. The figures were 57:43 over five years, 70:30 over seven years, 96:4 over 14 years, 63:37 over 17 years. Over all the 2520 investment periods of one to 20 years, cash wins 56:44. Only over 18 years and above did shares win comprehensively.
So there it is. The data. My conclusions? Best buy cash deposits can give market trackers a run for their (in fact, your clients’) money for periods up to 18 years. Advisers should consider them and investors should ask about them – especially when they are old and may not have 20 years to wait.
Before you bang off “yes, but…” and “what if?” comments please read the full research at www.paullewismoney.blogspot.co.uk, which will answer most questions, including: inflation, tax, time lags, crashes, other trackers and whether the past 21 years was typical.
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme.