Financial Expert Proves Cash Is Better Than Shares

Financial Expert Proves Cash Is Better Than Shares
Las Paz Mexico by Julian Cohen. Why?

A fascinating piece of research by a respected financial journalist unearths the surprising fact that holding your money in cash would have produced a better return than investing in shares over many different time periods

Below Is A Lovely Little Video Showing The Incredible Amount Of Money Humans Have Created, But First, See How Cash Could Make You More Money Than Shares

Cash Or Shares? That Is The Question!

Paul Lewis, presenter of the Money Box programme on BBC Radio 4, compared the money you could have made from a low cost FTSE 100 Tracker fund invested in 1995 with the interest you could have earned on the best one-year fixed rate savings bond each year in the same period.

The conclusion is very interesting.  It challenges the conventional wisdom that over longer periods, the stockmarket will produce a better return than bank and building society deposits.

Cash Versus Shares Revealed

Paul’s analysis discovered interest earned on savings accounts beat the total returns generated from an HSBC FTSE 100 Tracker fund in more than half (57 per cent) of the 192 five-year periods beginning each month from 1 January 1995.

Over the longer term, the results were even more staggering. Over the 84 14-year periods from 1995, cash beat shares in an incredible 96 per cent of cases.

What’s relevant to pension holders, particularly if you’re drawing an income from your SIPP or SSAS, is that since 1995, the shares lost money in a third of the periods spanning one to 11 years. 

It’s not just the fact you might be down on your money in these periods.  The hidden and often dramatic knock-on effect of falling share prices is explained more fully in this article entitled Beware The Danger Of Pound Cost Ravaging.

Whilst it can’t be said of shares, your cash balance in savings accounts always ends up higher than it started.  But it’s also fair to say that in the research, cash accounts didn’t always come out on top.

Over the entire 21-year period between January 1995 and January 2016, the FTSE 100 Tracker fund produced an average return of 6 per cent per year.  It beat the return from cash accounts, which averaged 5 per cent per year.

Paul explained the 1 per cent difference is lower than the so-called 'risk premium payoff' investors are typically quoted of 3 per cent to 8 per cent when investing in shares.  He concluded:

Cash Beat Shares From 1995 To 2015

 
 

Paul Lewis

Twitter @paullewismoney

The data presented here allow the boundary between cash and shares to be set at around 18 years. Less than that, there is a better than evens risk that a shares tracker will produce a lower return than a series of best buy cash accounts. For periods below 12 years, there is also a risk that a shares investment will lose money. Overall, for a random date and a random investment period, the safer bet is active cash rather than tracker shares.

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 beats a FTSE 100 Tracker more often than not.  And unlike a shares investment, it can never lose anyone money.

Cash Versus Shares Analysis

You can read Paul’s cash versus shares research.

If you want to check out the detailed ‘nuts and bolts’, which answers most questions including inflation, tax, time lags, crashes, other trackers and whether the last 21 years was typical, and is illustrated with tables and graphs, check out the cash versus shares analysis.

cash shares
cash shares

Discover How Much Money Have Humans Created, Including Cash And Shares, In This Marvellous Video

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That's our opinion.  Not just because AJ Bell was the first company to offer an online SIPP.  Nor that it's received many prestigious awards.  And not even because the wife of SIPPclub's Founder has an AJ Bell SIPP.  It's because it's one of the most competitive stockmarket SIPPs on the market. 

Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).  However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.

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