Can cash really trump shares?

Most advisers would agree that, over the long term, shares are the best place for your money. And in the short term you’re best to stick with cash. However, is this long-held wisdom necessarily true?

In this week’s Financial Times, consumer champion Paul Lewis sets out his argument that cash can in fact beat the stockmarket in periods of up to 18 years. His case goes like this. Lewis found that, since 1995, “active cash” – in other words, money kept in a best-buy account, then transferred a year later to the most up-to-date best-buy account – would have yielded a higher return than investing in an HSBC FTSE 100 tracker fund.

This “active cash” strategy also beat the total returns from the tracker in 57% of the five-year periods between the start of January 1995 and the end of December 2015. The effect was even more pronounced over 14 years, with cash beating shares 96% of the time.

It’s a striking finding, although it’s also easy to pick holes in his thesis. For starters, Lewis’s research finds that investing in the FTSE tracker secures much higher returns over the longer term. Over periods of 18 years or more, shares outperformed cash more often than not. And, over the entire 21-year period from 1995 to 2015, shares returned a compound 6% while cash managed 5%.

The research also makes the assumption that the saver involved is dedicated enough to identify and move his or her money into a best-buy account every year, while the investor is more apathetic, sticking with the tracker through thick and thin – the reverse of what you’d typically expect. If the investor had been just as active in switching to the cheapest tracker, or the best value part of the market each year, then Lewis’s results may well have been very different.

There’s also the obligatory warning that the past is no guide to the future. Just because savings accounts have fared well over the past 21 years doesn’t mean they will continue to do so in future. For the majority of the period that Lewis has covered, UK interest rates have been positive in real terms (after inflation). That simply isn’t the case any more. Back in 1998, if you saved £10,000 into the UK’s best-buy one-year deposit account, you could have walked away a year later with £10,800. Today, if you save £10,000 into the best-buy one-year savings bond, you’ll pocket just £10,166 a year on.

Tracker funds are also a lot cheaper than they were in the past. Most trackers would have set you back at least 1% a year if not more in 1995, but the HSBC fund in question now charges just 0.18%. Over the next 20 years, the cost of an average tracker is likely to fall substantially again, making it harder for cash to come up trumps.

Finally, while the HSBC FTSE 100 tracker beat cash in 57% of five-year periods, the results differ when applied to the HSBC FTSE 250. Lewis found that this tracker had a much better result between 1 March 1998 and 1 April 2016, beating cash in 65% of periods.

All in all, Lewis’s research is a reminder that cash can be underrated as an asset class, and that it definitely deserves its place on your portfolio as an asset all of its own. But it doesn’t overturn the long-held view that for money you can lock up for the medium to long term, the best returns are likely to come from stocks.

Best easy-access savings accounts on the market (according to Moneyfacts)
Charter Savings Bank 1.66%
OakNorth Bank 1.65%
Habib Bank Zurich 1.55%
Axis Bank 1.40%
Sainsbury’s Bank 1.30%