Based on a major study conducted since 1995 on the performance of savings and investments, keeping your cash in a best-buy savings account can often provide better returns than investing in stocks.
So, which is really better?
The research which was done by financial journalist Paul Lewis (not related to Martin Lewis, founder of MoneySavingExpert.com), showed that most investment periods in the last 21 years, stashing money in best-buy cash savings accounts would have given a saver more than a FTSE 100 shares tracker (following the index of shares in the biggest 100 firms on the London Stock Exchange directory).
Traditionally, investments in shares has remained the best way to build your wealth; however, that does not seem to be the case now according to the research, which likewise emphasizes the stark reality of losing money through investing.
What did the research really confirm?
The study compared gains from a simple HSBC tracker fund (which 'tracks' the FTSE 100 index of shares) with cash put yearly into a best-buy one-year deposit account with a bank or building society – also referred to as a 'one-year bond'. It assumed that dividends were invested back while the cash was also invested back yearly together with earned interest. The study showed the following:
· Savings accounts overtook the overall gains on the tracker in 57% of the 192 five-year investment periods commencing monthly since 1 January 1995. On the other hand, the tracker scored only 43% of the same durations.
· Over longer time durations, the difference was even more pronounced. For instance, in more than 84 14-year periods from 1995, cash-savings handily overran investments in shares with an impressive 96% score.
· When considering a various periods of investment since 1995, such as from one to 11 years, the study found investments in funds that follow the FTSE 100 would have ended up losing money up to 33% of the time. However, keeping your money in a savings account assured you a gain over the original amount, a virtually risk-free proposition.
· Nevertheless, savings accounts did not win in each situation. The research showed that throughout the full 21-year period from 1995 to 2016, best-buy savings accounts would have delivered an average 5 % “annual compound return” (rate-of-return on your investment) against the 6% HSBC tracker fund would have produced.
But while shares led over the entire period, this finding is still remarkable. Although investors are ordinarily told an average 'risk premium' (which is the extra gain you expect to get by 'risking' an investment in a tracker instead of keeping a bank savings account) of 3% to 8%; however, this study seems to point to a slight gain near 1%.
In short, best-buy savings accounts are more advantageous than investing in the stock market since savings account will never be lost while investments in shares may disappear.
So, how was the research undertaken?
Paul Lewis, who presents Radio 4's Money Box program, acquired data from best-buy cash records since 1995 from Moneyfacts, a financial information publisher.
He states, "This new study of the data proves that people who choose to keep their cash safe in savings accounts have a higher rate of winning over those who prefer tracker funds in most of time periods.
"Likewise, it verifies that the risk of incurring losses on stock investments is quite real. Over any investment period of one up to five years from 1995 to 2015, about one out of four chances or more resulted in the investment’s failure. For longer periods of nine or ten years, the chance of failing was about one out of ten. Only a few financial consultants are aware of such odds and even fewer tell their clients about them.
"For so long, I have long assumed that the value of cash was played down by conventional study which tend to put out poor cash rates in comparison with overstated gains in stocks investments."
So, should we then do away with investing in shares?
It really depends on one’s risk capacity. Whereas this study sheds new light on the issue, whether you invest or save, it is an individual’s choice wholly dependent on one’s outlook on risk; hence, if you are comfortable with taking risks, you may find your fulfillment in shares.
Lewis's study discovered periods when shares gave a higher gain than cash, such as from 1 November 2008 to 1 September 2009; and during the entire 21-year-period, shares enjoyed a slight advantage.
In general, however, for investment periods of five years or more, cash savings gave a better return over shares: 38 against 24, respectively.
Moreover, Lewis says: "In every situation, cash may not be right for everyone. However, for a cautious investor over long periods of time of up to two decades, this study points to the advantage of well-managed active cash over a FTSE 100 tracker in most cases. The clincher for people who look for a sure winner is that a cash account will produce more money than what they put in."