We're often told of the benefits of saving in shares rather than cash, with the general consensus being that stock market investment will lead to far higher returns. But has this advice been wrong the whole time? New research from Paul Lewis, using Moneyfacts' own savings data, shows that cash could still be king after all…
Best buy bonanza
The analysis found that money held in best buy savings accounts would actually have produced a higher return than a FTSE100 shares tracker over a majority of investment periods since 1995, challenging the view that the savings account is the "poor relation" of stock market investment.
Not only that, but the volatile nature of the stock market – not to mention the fact that returns can never be guaranteed – means that since 1995, investments in funds that track the FTSE 100 would have lost money up to a third of the time. The amount of cash in a savings account, however, always ends up higher than when it started.
Lewis' research compared the returns from a simple tracker fund (which follows or 'tracks' the FTSE100 index of shares in the
The results speak for themselves: money actively invested in cash savings accounts beat the total returns of the FTSE100 tracker in 57% of the 192 five-year periods surveyed (those beginning each month from 1 January 1995 to the present), which means that the tracker won in just 43% of those periods.
The results can be even more marked when looking at longer time periods: for investments made over 14 years, for example, cash beat shares 96% of the time.
"This analysis of the new data shows that people who prefer the safety of cash can make returns that beat those on tracker funds in a majority of time periods," said Lewis.
"It also confirms that the risk of making losses on a shares investment is very real. Over any investment period from one to five years from 1995 to 2015, there was about a one in four chance or greater that the value of the investment would fall. Even over nine or 10 years the chance of losing money was around one in 10. Few advisers know those odds; still fewer inform their clients of them.
"I have long suspected that the merits of cash were underplayed by traditional research, which compares poor cash rates with often exaggerated gains on investments in shares."
Indeed, these results probably wouldn't be replicated if the saver instead chose the average one-year bond each year rather than the best buy, which just shows the importance of being proactive when it comes to your savings, and making sure you find the top-paying account.
Leaving your cash in poor-paying accounts will do little to your bank balance, but if you take the time to move your savings around it could make all the difference. This can even be the case if you were thinking of investing for relatively short time periods, with the analysis showing that, for many starting dates from 1 January 1995, investing in shares over any possible period from one year upwards – and in some cases for just a few months – would have produced a lower return than using properly-managed best buy cash.
Overall, money invested in a best buy savings account over the full 21-year period surveyed (1 January 1995 to 1 January 2016) would have produced an average annual compound return of 5.0%. Although the tracker would have produced a slightly higher return of 6.0% over the same period, the 1% difference is far lower than the 3% to 8% typically quoted for the 'risk premium' of investing in shares – and for many people, the risk may not be worth it, particularly when shorter investments can often lead to better cash returns.
"Cash is not right for everyone in all circumstances," added Lewis, "but for a cautious person investing for periods of up to 20 years, this research indicates that well managed active cash will beat a FTSE100 tracker more often than not. And unlike a shares investment it can never lose anyone money."
Want the security of cash and the potential to beat stock market returns? Check out the top savings accounts
Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.