Paul Lewis: best-buy cash savings can beat returns from shares

New 'unique' research from BBC finance expert challenges investment mantra by looking at the performance of investment and savings over 21 years.

Money stashed in best buy savings accounts would have performed better than money put in shares in the majority of five-year investment periods since 1995, a new study is has claimed.

The research conducted by financial journalist Paul Lewis, the presenter of BBC Radio 4’s Money Box, compared the returns from a tracker fund following the FTSE 100 share index (which follows the biggest 100 companies listed on the London Stock Exchange) with the returns on cash that is actively moved into a best buy one-year fixed rate bond each year.

The findings of the report challenge the traditional view that investing money will get you a much better return than saving money in cash.

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What the research found

The research found that the money put into savings accounts beat the total returns of money put into a simple HSBC tracker fund in 57% of the 192 five year periods beginning each month from 1 January 1995 to the present.

Over the long term, the results were even more marked. Over the 84 14-year periods from 1995 for example cash beat shares 96% of the time.

The analysis also found that since 1995 investments in funds that track the FTSE 100 would have lost money up to a third of the time over investment periods spanning one to 11 years. However, the balance in savings accounts always end up higher than it started.

There was also evidence 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.

That said savings accounts didn’t come up trumps in every scenario.

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The case for investing

Over the entire 21-year period between January 1995 and January 2016 the tracker managed to produce a compound annual return of 6%, which beat the 5% return from the best buy savings accounts.

However, Lewis said this 1% difference is still lower than the risk premium payoff investors are typically quoted of 3% to 8% when investing in shares.

He did concede there was a turning point when shares overtook cash savings.

He told the BBC: "Over the longer-term, shares are likely to do better but I wanted to find out when the boundary is. My research shows that it's only at about 18 years that the balance turns in favour of shares over cash."

Why the report is unique

It’s widely believed that cash put into shares perform better than cash put into a savings account over the long-term.

However, Mr Lewis is challenging this generally-accepted investment wisdom and claims the view is supported by misleading data.

"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 said.

Mr Lewis claims the research is unique and gives different results for three main reasons.

Firstly, it uses a real tracker including gains and losses after charges.

Secondly it uses new data on best buy cash savings accounts from financial information website Moneyfacts that has never been collated before.

Thirdly it also assumes a saver is ‘active’ moving cash once a year into the best deal, an approach Mr Lewis has dubbed ‘active cash’.

He said: “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. It also confirms that the risk of making losses on a shares investment is very real.”

Should you bother investing?

The research will give many investors food for thought and will shed new light on the debate.

But it certainly doesn’t mean you shouldn’t invest in shares.

The report notes periods when shares produced a higher return over every possible investment period as between 1 November 2008 and 1 September 2009 as well as 1 October 2002 and 1 October 2003. Plus, over 21 years investing in shares has come up better.

However, overall for investment periods of five years or more there are 38 starting dates when cash would always have produced a better return compared to 24 starting dates for shares.

Lewis adds: “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 FTSE100 tracker more often than not. And unlike a shares investment it can never lose anyone money.”

What an investment expert thinks

Laith Khalaf, senior analysts at Hargreaves Lansdown was sceptical about the findings.

He said: “The idea of “active cash”, whereby savers continually move their money between best buy accounts, is a very appealing idea, but is difficult to achieve in practice right now.”

However, Khalaf agreed the risk averse and those that need access to money over the short-term could be better off putting their savings in a best buy account.

He said: “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, Khalaf points out cash rates aren’t what they once were and tracker prices have come down significantly. He also suggests active funds, where a manager tries to beat the market, are also available to investors which have comfortably beaten the FTSE 100 and the 'active cash' approach referred to in the study.

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