Stocks & shares beat cash over 30 years

Stocks & shares beat cash over 30 yearsThere has been a lot of debate in recent years about whether investments really deliver better returns than cash over the long-term, and whether index tracker funds are a better buy than actively managed investments.

Let me take you back for a moment, to almost 30 years ago.

On 27th October 1986, the ‘Big Bang’ took place, which refers to the sudden deregulation of financial markets.

This was the result of an agreement three years earlier by Margaret Thatcher’s government, settling on a wide ranging anti-trust case against the London Stock Exchange.

Big Bang measures included the abolition of fixed commission charges and of the distinction between stockjobbers and stockbrokers on the London Stock Exchange, and change from open-outcry to electronic, screen-based trading

Nearly 30 years on from the ‘Big Bang’, new research by Fidelity International has considered how your money has performed over the past three decades.

Analysis from Fidelity International shows a deposit of £10,000 in the average UK savings account back in 1986, would now be worth £28,196 in the bank.

If on the other hand you invested in the FTSE All Share over the same time period, that £10,000 would now be worth £121,466.

Alternatively, if you had opted to invest your £10,000 in the FTSE 100 index, you would now be sitting on £126,867 after 30 years. If you had chosen the FTSE 250 index, that £10,000 would now be worth £265,035.

The research by Fidelity also pokes a sharp stick in the direction of investors who are passionate about index tracker funds.

They found that placing £10,000 in 1986 with an active fund manager – in the case of their research, the Fidelity Special Situations Fund – would have resulted in a current value of £401,868.

An investor taking a more diversified approach, again using an actively managed fund (in this case, BlackRock Continental European fund), would have seen their pot rise from £10,000 to £427,181.

According to Tom Stevenson, investment director for Personal Investing at Fidelity International:

“If anyone is unsure about the benefits of investing in the stock market over stashing cash under the mattress, especially over the long term, then our calculations highlight just how rewarding investing can be.

“On a 30 year time horizon – a realistic investing timescale for many people – simply investing, holding on and reinvesting dividend income can lead to really impressive returns.

“With interest rates at record lows and looking as if they could fall further, the adage that cash is king really doesn’t hold much water these days.

“UK savers looking to achieve decent long term returns really need to be looking further up the risk spectrum, investing in the slightly riskier bonds issued by companies rather than governments or moving into stocks and shares.”

The usual caveats of course apply whenever we consider this type of research.

Past performance is no guarantee of future investment returns. What has happened in the past will not necessarily happen over the next thirty years.

That said, the way investing works is that investors receive a ‘risk premium’; the potential for higher returns when they expose their money to greater levels of risk.

This relationship between risk and potential rewards is a fundamental part of investing money. It follows that investors should have a reasonable expectation that cash will be beaten by stocks and shares over longer timeframes.

Thinking specifically about the actively managed funds mentioned in the research, it is of course easy to pick strongly performing investment funds today, with the benefit of hindsight.

It is less straightforward for an investor today to choose an actively managed fund which will be the best (or one of the best) performers over the next thirty years.

It is for this reason that so many investors are using low-cost index tracker funds within their portfolios, which take the guesswork out of fund selection.

A lot can and does happen during a thirty year timeframe.

Under ordinary circumstances, we would expect stocks and shares to deliver a much (much) higher return than cash over such long periods of time.

The unknowns during that thirty year timescale are what make investing for the long-term so interesting; in particular having the nerve to ride out significant market crashes, rather than panicking into a sudden sale of assets and then missing out on subsequent recoveries.

The most successful investors will continue to take the long-term view, hold a diversified portfolio containing a range of different investment types, and periodically rebalance their investments each year to maintain the correct balance of risk.

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About Martin Bamford

Martin Bamford is a Chartered Financial Planner, Certified Financial Planner (CFP) professional and published personal finance author. He works with elderly clients to provide advice on funding residential care fees, hosts the Informed Choice Podcast and is a keen ultra runner.
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