"Between January 1995 and December 2015 cash triumphed over FTSE-100 96% of the time."by Andy Davis / July 14, 2016 / Leave a comment
Paul Lewis, the presenter of BBC Radio 4’s MoneyBox, published a fascinating and provocative blog a few weeks ago that will have irritated most people in the financial services industry and pleased many of their customers. Lewis simply worked out how a saver would have done if they’d put their money in the “best buy” one-year deposit account every January since 1995. He then compared that to the performance of a fund that tracked the FTSE-100 over the same 21-year period.
Rather embarrassingly for the financial professionals, cash beat the FTSE 100 most of the time. Of the 192 five-year periods starting on the first of a month between January 1995 and the end of 2015, it came out ahead in 57 per cent of them. Of the 84 possible 14-year periods between 1995 and 2015, Lewis found cash triumphed in 96 per cent of cases.
This is not what is supposed to happen but it does help to explain why so many people deeply mistrust the stock market and prefer to keep their savings as cash on deposit instead of investing it. Provided they’re happy to shop around regularly for the best rates, it seems to work.
I found Lewis’s conclusions interesting, but not for the reason highlighted in most of the coverage: that returns from cash beat shares. This is bound to be the case at least some of the time because share prices can rise and fall so violently—arguably, Lewis’s finding is just another way of saying that cash is a much less volatile investment that equities.
What struck me about Lewis’s article was its call to manage your cash as if it were an investment rather than just leaving it alone. “Active cash,” as Lewis calls it, makes a lot of sense, especially now that deposit rates are so low, and I’m sure this instinct to hunt for higher returns on their cash is responsible for pushing thousands of retail savers into new areas such as peer-to-peer lending (P2P).
P2P loans offer much higher returns than deposit accounts (albeit with more risk) and have become an important part of my portfolio. But they’ve always had one major drawback: if I want real diversification I need to lend money through several P2P sites so that I’m not risking it all one pool of…