Shares vs property: Which is best for savers?

by Ed Bowsher on 30 December 2010  |  16 comments
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Where's the best place to invest your hard-earned savings?

Most of us have to work pretty hard to build up a savings pot, so once we've done all that scrimping, it makes no sense to let our money be lazy. It's essential to get as high a return as possible. But that begs the question: where will your savings grow  the most? Should you put your money in the stock market? Or property? Or in a savings account?
 
Sadly, I don't have a crystal ball, so I can't say which option is best with 100% certainty. But I can look at what's happened in the past. So I'm going to look at how cash, bonds, property and shares shares have performed over the last fifty years. Hopefully, history will prove to a good guide to the future.

Cash 

I'm surprised by how well cash has done. Over the 50 years to 2009, it’s delivered an average real return of 1.9% a year. In other words, cash has grown by inflation plus 1.9% a year.

I’m surprised cash has done so well because in my experience it can be really tough to beat rising prices if you’re holding cash. That’s certainly true now. The best easy-access savings accounts are currently paying 3% a year which is well behind retail price inflation at 4.5%. That’s an annual real return of minus 1.5% a year.

Of course, the attraction of cash has always been security. And regardless of the financial crisis, cash is still very secure today. Let’s not forget that even during the heights of the financial panic, no one with a UK-based savings account lost money in the end.

Gilts

Gilts are also normally seen as a pretty safe investment. Gilts are bonds that are issued by the government - if you buy a gilt when it's issued, you're effectively lending money to HM Treasury. Gilts are seen as safe because the British government hasn't defaulted on its debt since 1693. However, in the current economic climate, you can’t be 100% certain that the government will pay back all your money at the end of the gilt’s term.

So gilts are a bit riskier than cash and, sure enough, with the extra risk you get a slightly higher return. Over the last 50 years, gilts have delivered a real return of 2.3% a year. Once again, that’s on top of inflation. Interestingly, gilts have done much better over the last 20 years, delivering a real return of 5.4% a year.

Houses

The British love property and it's easy to see why. Between 1959 and 2009, the price of the average UK house has risen from £2,507 to £162,085.** Even if you take out inflation, UK house prices still rose 278% over that period. That's an average rise of 2.7% a year.

I should add that these numbers don’t include any rent that landlords might receive from their investment. You could argue that’s the wrong comparison; on the other hand, most of us only invest in the property that we live in, so I think it’s the best reflection of the way things work for most people. 

Shares

The stock market is the clear winner in this contest. Over the 50 years to 2009, shares have delivered a real return of 5.2% a year. That figure includes rising share prices and shareholders’ dividends.

This return is much higher than property at 2.7% a year although we shouldn’t forget that my property figure doesn’t include any rent.

I think the stock market’s outperformance is even more striking when you look at what would have happened if you had invested £1000 in the different assets in 1959.

Value of £1000 invested in different assets after 50 years, starting in 1959. These numbers exclude inflation

Volatility

The biggest downside of investing in the stock market is the volatility. There are decades where the performance is very strong, and decades where the performance is very weak. The other assets deliver smoother returns than shares although, even then, the returns are more volatile than you might expect.

Average annual real return of assets over decades (%)

What will do best going forward?

Of course, there’s no guarantee that shares will perform so strongly over the next 50 years. In fact, I’m pretty confident that the performance will be less impressive. That’s because our population is ageing.

As the population ages, more people will be selling shares to fund their retirements and there will be fewer younger people to buy those shares from them – hence the demand for shares will be lower. (For most people it’s their pension funds who do the buying and selling, but the effect is the same.)

I also suspect that gilts are going to have a rotten time over the next few years. That’s because inflation and interest rates will probably rise and that combination is always bad news for gilts and other bonds. 

However, in spite of my caveat about the ageing population, I think these figures show that you’d be mad not to invest some of your savings in shares. That’s as long as you remember that investing in the stock market is a long-term game and you should be prepared to hang on to your shares for at least ten years.  

Tell us what you think

Do you agree or disagree with my predictions? What are your own predictions? I'd love to hear them. Please post them in the comments box below!

More: Why investing is not gambling

*Cash figures were taken from the Barclays Gilt Equity Study 2010. The Barclays study calculates its cash figure by looking at returns from various building society savings accounts that were available over the 50 year period. 
** All figures on house prices were taken from the Halifax House Price Index.
***Figures on gilts and shares are taken from the Barclays Gilt Equity Study