'Cash beats shares!' BBC journalist Paul Lewis challenges conventional investing wisdom in study covering 21 years
- Huge study challenges conventional wisdom that investing in stocks is more rewarding than saving over the long term
- It assumes savers find a best buy account and move money every year
- Lewis describes 1995-2016 findings as 'an antidote' to the accepted view
Paul Lewis: 'I have long suspected that the merits of cash were underplayed'
Saving in best buy cash accounts over the past two decades beat putting your money in a FTSE 100 tracker the majority of the time, according to research by BBC Money Box presenter Paul Lewis.
The high profile financial journalist has carried out a huge study which challenges the conventional wisdom that investing in stocks is more rewarding than saving if you stick with it over the long term.
Covering the period from 1995 to the present day, the research assumes savers are nimble enough to find the best buy account and move their money there every year.
We explain Lewis's findings - which he describes as 'an antidote' to the accepted view - and the comeback he's had from investing and savings experts below.
Cash beats shares: What did the research uncover?
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.
Lewis also highlighted that the tracker fund lost money up to a third of the time over investment periods ranging from one to 11 years - whereas cash savings will always grow.
The research took into account dividends reinvested in the tracker and any interest earned reinvested in cash savings, so gains from compounding were included in both cases.
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.
Lewis says money invested in best buy cash 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 the tracker would have produced a compound annual return of 6 per cent.
That 1 per cent difference is far lower than the 3-8 per cent typically quoted as the ‘risk premium’ of investing in shares rather than cash, explains Lewis.
Cash vs shares: New research assumes savers are nimble enough to find the best buy account and move their money there every year
'Cash is not right for everyone in all circumstances. But for a cautious person investing for periods of up to 20 years this research indicates that well managed active cash beat a FTSE 100 tracker more often than not. And unlike a shares investment it can never lose anyone money,' says Lewis.
'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.'
He says his new analysis produces different results for three reasons:
1) It uses a real tracker fund, the HSBC FTSE 100 Index, and all the gains or losses are after its charges, currently 0.18 per cent, are deducted
2) It uses new data from independent comparison site Moneyfacts on best buy cash accounts
3) It moves savings annually into the latest best buy account.
WHAT ARE TRACKER FUNDS?
Tracker funds are known as 'passive' because they follow the performance of the world's biggest markets but don't try to beat them.
Investors pour money into such investments because although they only match index performance, they are far cheaper than 'active' funds.
These are where managers pick investments more selectively with the aim of outdoing the market. However, active funds often still underperform despite charging a lot more.
Tracker fund providers keep their costs down by either just buying up all the stocks in an index or using complicated financial instruments to clone market performance.
A price war among tracker fund providers over the past few years has seen charges slashed further, with some now charging as little as 0.06 per cent.
But while competition is cutthroat among some fund houses, others still charge up to 1.5 per cent, so it's worth shopping around for the best deal. Check out cheap and expensive trackers here.
When picking a tracker fund, it's also worth checking the tracking error - how closely performance matches the underlying index. Find out more here.
The best-known other research comparing different types of investment is the annual Barclays Equity Gilt Study, but Lewis contends that this overstates the returns on investing in shares because it doesn't include charges, and understates the returns on cash because it doesn't use the rates on best buy accounts.
The Barclays study, which uses data stretching back to the nineteenth century, employs three-month Treasury bills - short-term Government debt - to represent cash savings.
As a more modern form of comparison, Barclays uses the interest rate on an instant access postal building society account.
Meanwhile, Lewis says that in his study, he hasn't taken account of income tax in the returns on cash savings.
Income tax isn't levied on money in cash Isas or pension funds, and since April 2016 not on basic rate taxpayers who earn less than £1,000 in interest a year.
When he ran the figures with interest reduced for basis rate tax, cash still beat shares in the majority of time periods but the effect was smaller, he explains.
Lewis acknowledges his study is about the past, saying: 'The results are clear. But the lessons for the future are complex. Interest paid on cash is at historically low levels and seems to be heading lower. The charges on trackers have come down from their past levels. But losses on trackers are still happening – in 2015 for example.
'The mantra about the past being no guide to the future is true of managed funds providing good investment returns (though bad returns do tend to persist). But they are not relevant to a study such as this which assumes that no moment is special and looks at the results of picking a random date (on 1st of month) and investing for a random period (1-20 whole years).'
The period he scrutinised from 1995 has seen some huge booms and busts on the stock market, while best buy rates on savings accounts have been far higher at times than they are at present.
But Lewis says: 'I don't think the last 21 years - although there were some dramatic moments - were that unusual. There has been no golden age period of stability.'
The full results of Lewis's study can be found on his website here.
Cash vs shares: What do investing experts say?
Laith Khalaf: 'Charges on tracker funds have been cut to the bone, thanks to the passive price war that has been raging for the last few years'
‘A balanced savings approach encompasses both cash and shares in order to maximise returns while providing some ballast,' says Laith Khalaf of DIY investment broker Hargreaves Lansdown.
'Savers who are very risk averse, or who may need their money in less than five years’ time, should stick with cash, as over shorter periods the chance of losing money on the stock market is higher.
'However, with cash rates on the floor and showing little sign of perking up, it is only prudent for investors to consider putting their long-term money into the stock market.
'This is particularly the case given that the charges on tracker funds have been cut to the bone, thanks to the passive price war that has been raging for the last few years.'
Khalaf also notes that active funds, where a manager tries to outdo the market, are also available to investors.
'On average these have comfortably beaten the FTSE 100, and some have wiped the floor with it,' he says.
'Saving sensibly is always a case of achieving a personal balance which you feel comfortable with, rather than chucking all your eggs into one particular basket, whether that’s a piggy bank or a share dealing account,' adds Khalaf.
Hargreaves has compiled the following table, which includes annualised returns from 1995 to 2016 from the average actively managed UK fund and from top fund manager Neil Woodford, in both cases after charges have been deducted.
How does 'active cash' stack up against investments? Neil Woodford's performance includes returns from both his Invesco Perpetual and Woodford Equity Income funds (Sources: Hargreaves Lansdown, Lipper Hindsight and ‘Cash Beat Shares from 1995’ by Paul Lewis)
Patrick Connolly, of financial services firm Chase de Vere, says: 'The research produced by Paul Lewis makes interesting reading and should at the very least be "food for thought" for many investors.
'Some of the assumptions he makes aren’t practical, such as being able to instantly access the best paying savings account each year and for non-Isa cash savings not being liable to tax on interest (in the past)
'However, his numbers still have some merit. It is an easy counter-argument to say that many active funds outperform the FTSE 100 index. However, the reality is that many active funds also under-perform and many investors make the wrong decisions, such as jumping into shares near the top of the market.'
Connolly says that where Lewis is right and investors get it wrong is that even if cash savers miss out on the best paying accounts, it is difficult to go too far wrong when saving in cash - you know your money will always be there the following morning.
He reckons that where Lewis is wrong is that the research assumes the investment option is being fully invested in the FTSE 100.
'It is true that many people who aren’t taking advice won’t have enough diversification in their portfolios and are likely to be taking too much risk.
'However, Paul is absolutely wrong when, referring to the likelihood of the FTSE-100 falling, he says, 'few advisers know these odds still less inform their clients of them.
'The overwhelming majority of independent financial advisers are well aware of the risks of stock markets and inform their clients, which is why these clients are likely to hold a balanced portfolio including shares, fixed interest, property and cash rather than being fully invested in shares.'
Cash holds its own: What does a savings expert say?
'It's good to see cash can hold its own as well as being a safe haven,' says Anna Bowes of independent rate checking website Savings Champion. 'The key factor here is that you have to be active with that cash which means you have to move when it's not competitive.
'The biggest danger for savers is inertia. They play into the hands of banks and building societies which allow rates to drift downwards, especially the longer they may hold the accounts.'
Bowes says cash saving has its place and can actively provide a good return, but it isn't for her to say one thing is better than other.
She adds that clearly Lewis' research covers the past, saying: 'We don't know what will happen and rates have been dropping.'
She advises savers to find the best rates, monitor their accounts, and move if they are no longer competitive.