New research from Radio 4’s Money Box presenter Paul Lewis has challenged the conventional view that shares always offer a better return than cash.
According to Lewis, using money in best-buy cash savings would have produced a better return compared to a FTSE 100 tracker over a majority of investment periods since 1995.
The research compared returns from a FTSE 100 tracker fund with cash that is moved each year into a best-buy one-year deposit account. It took into account dividends reinvested in the tracker and any interest earned reinvested in cash savings.
Money put into ‘active cash’ beat total returns on the tracker in nearly two-thirds of the 192 five-year periods from 1995 to 2016.
Hargreaves Lansdown says balanced savings requires cash and shares to maximise returns and provide stability, although both can be used for different goals depending on individual risk appetite.
Independent savings adviser Savingschampion.co.uk director Anna Bowes says: ‘The key thing about these figures is they show that if you actively manage your cash, it can hold its own.
‘But we do need to be careful, because one of the biggest risks to savers is inertia.
‘You have to think of cash as not just a place to hold money and keep it safe, but keep it active, to earn as much interest as possible.’
Cash can be suitable for savers who are risk-averse and who may need the money in the short-term but low cash rates with little signs of improvement can be seen as the reason to invest in shares, in a bid to diversify a portfolio and maximise returns.
The Bank of England’s base rate has remained at 0.5% over the last seven years and interest rates are expected to rise slowly. This means cash is unlikely to generate returns in line with its historical performance in the near future.
Hargreaves Lansdown says experienced active managers have consistently delivered returns above the UK stock market, even after charges have been deducted.
The analysts also point out shares outside the FTSE 100 have made a significant contribution to stock market returns over the last 20 years, illustrating the need to look beyond the blue chip stocks included in Lewis’ study.