Main conclusion:-
A couple of points, the analysis seems to be to have taken an average Index tracker fund (in terms of charges) and compare it to the best 1 year deal available for cash, over various periods. But they only seemed to have looked at which 'won' or 'lost' rather than adding 'by how much', though this will be catered for by the analysis over different period lengths. I would have expected the tracker to have done better as the periods got longer, but they won decisively in short periods but in only 6% of 15-yr periods, rising to 100% of 20yr periods , though obviously the sample size is smaller.
However, I am not sure the last conclusion is backed up by the evidence.
Worthwhile reading for anyone investing for the long term, but I don't think you can apply the conclusions in the current low-interest, low-inflation climate for two reasons: firstly the base rate is at a record low of 0.25%, and seems to be stuck low. I would guess it averaged more like 5% over the study, which would favour cash, its hard to get a real positive return from cash right now, and secondly charges on passive funds have come down a lot due to competition in the market. The HSBC fund they chose currently has an annual charge of 0.18% (almost certainly higher in previous years as they concede and Any annual charge has a profound effect over the longer term. to quote the report) and you can buy a FTSE tracker now from the likes of Vanguard for 0.08%, less than half price.
I will not be locking my money into cash any time soon.
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.
A couple of points, the analysis seems to be to have taken an average Index tracker fund (in terms of charges) and compare it to the best 1 year deal available for cash, over various periods. But they only seemed to have looked at which 'won' or 'lost' rather than adding 'by how much', though this will be catered for by the analysis over different period lengths. I would have expected the tracker to have done better as the periods got longer, but they won decisively in short periods but in only 6% of 15-yr periods, rising to 100% of 20yr periods , though obviously the sample size is smaller.
Adding all the data for all investment periods from one to twenty years cash wins in 55.7% of the 2520 periods and shares in 44.3% of them. Overall cash beat shares.
Over the whole 21 year period the tracker out-performs cash. £10,000 invested in a tracker on 1/1/1995 becomes £34,098 by December 2015, a compound growth rate of 6.0% a year. Cash achieves nearly £6000 less finishing at £28,105, a compound growth rate of 5.0%. But the low difference between the risk free cash and the risky shares is striking. Bodie*(Financial Analysts Journal May-June 1995 pp. 18-22)*finds that the risk of investing in shares does not diminish as time invested lengthens.
I will not be locking my money into cash any time soon.
Comment