Why long-term investing works: How putting £10K into the stock market would have earned you £90K more than cash savings over three decades
- 30 years after the 'Big Bang' stock market deregulation, shares have beaten cash hands down
- A £10K investment in the FTSE All-share would be worth £121,466
- The same amount in a standard savings account would be worth £28,196
While the stock market goes up and down, when it comes to investing it seems that it's worth playing the long game.
Next month marks 30 years since the 'Big Bang' deregulation of the stock market, which helped open up investing to the masses.
Since then there have been several significant market crashes, including Black Monday and the global financial crisis of 2008.
These major events are often cited as a reason why many people consider investing to be too risky for them. But, despite the volatility, putting your nest egg in the stock market would have proved far more lucrative than a savings account, research claims.
Squirreling it away? Stock markets go up and down - but over time give better returns
Had you placed a deposit of £10,000 in the average UK savings account back in 1986, it would now be worth £28,196, research by investment house Fidelity International says.
If, on the other hand, you had invested the same amount in the FTSE All Share over the same time period and reinvested the dividends that £10,000 would now be worth £121,466.
Had you put your money in the FTSE 100 it would now be worth even more - £126,867.
If you opted for the FTSE 250, it would have become a whopping £265,035.
Meanwhile, investors who invested their money with an active fund manager could have been even more handsomely compensated - provided they picked the right one.
If they had put their £10,000 nest egg in the Fidelity Special Situations fund - which specialises in unloved 'turnaround' companies - in 1986, they could now be sitting on £401,868.
Or if they had put it in the BlackRock Continental European fund, which invests in a diversified range of European larger companies, it would be worth an even more impressive £427,181 - nearly £400,000 more than had the cash been left in a savings account.
The analysis was done by Fidelity international, based on a £10,000 investment between 31 August 1986 and 31 August 2016.
The key to the bumper total returns was reinvesting dividends, said Fidelity's Tom Stevenson. However, it's worth noting that investment charges - for funds, shares, investing platforms or advice - would have eaten into the returns listed above
Playing the long game: The stock market trounces a savings account over the longer term
Tom Stevenson, investment director for Personal Investing at Fidelity International, said: 'If anyone is unsure about the benefits of investing in the stock market over stashing cash under the mattress, especially over the long term, then our calculations highlight just how rewarding investing can be.
'On a 30 year time horizon – a realistic investing timescale for many people – simply investing, holding on and reinvesting dividend income can lead to really impressive returns.'
Stevenson points out that interest rates have tumbled dramatically since the Bank of England cut the bank rate to 0.25 per cent, spelling bad news for cash savings.
'With interest rates at record lows and looking as if they could fall further, the adage that cash is king really doesn't hold much water these days.
'UK savers looking to achieve decent long term returns really need to be looking further up the risk spectrum, investing in the slightly riskier bonds issued by companies rather than governments or moving into stocks and shares.'
|Form of investment||Amount after 30 years|
|FTSE All-Share (total return)||£121,466|
|FTSE 100 (total return)||£126, 867|
|FTSE 250 (total return)||£265,035|
|Fidelity Special Situations Fund||£401,868|
|BlackRock Continental European Fund||£427,181|
|Source: Fidelity International|
However, the Fidelity findings are at odds with recent research released by former BBC journalist Paul Lewis.
In a high profile study, he discovered that cash beat shares more often than the other way around.
Lewis compared returns from the top one-year deposit account each year since 1995 to the money made on a simple tracker fund cloning the performance of the top 100 shares listed on the London stock market.
This 'active cash' beat the tracker in 57 per cent of 192 rolling five-year periods from 1 January 1995 onwards.
And cash did even better over longer periods, beating the tracker fund 96 per cent of the time in the 84 rolling 14-year periods since 1995.
However, his study was done over 21 years, between 1995 and 2016, while the Fidelity study covered the 30 years between 1986 and 2016.
Over the whole period shares did win out but by a small margin that is small enough for savers to question whether the risk was worth it.
And Lewis found that money invested in a best buy cash account over the whole 21-year period from 1 January 1995 to 1 January 2016 would have produced an average annual compound return of 5 per cent, while a FTSE 100 tracker fund would have produced a compound annual return of 6 per cent.
His calculations were based on 'best buy' cash accounts, in which the saver moves their money each year to the best available deal on the market.
By contrast, Fidelity's research compared putting £10,000 in various stock markets or actively managed funds with putting the same amount in Morningstar's UK Savings 2500 (G) MP002 which tracks the average UK cash saving account rate.
So while neither study is necessarily wrong or misleading, one highlights the power of investing long-term, and the other the power of being an active saver, cherry picking the accounts that offer the highest level of interest.
Going forward from here, neither cash or shares look set to be the clear-cut winner.
Historically low interest rates mean that good deals for savers are evaporating fast, but global economic events such as the triggering of article 50 in the Brexit negotiations and the upcoming US election could mean greater volatility in stock markets.