Over the last ten years – from 31 December 1999 to 31 December 2009 – cash was a clear winner, according to the authoritative Barclays Capital Equity Gilt Study (EGS) 2010.
UK shares produced a gross return of –1.2% a year, once reinvestment of dividends and inflation were both taken into account. Cash, on the other hand, offered a post-inflation return of +1.8% a year. However, there are two key factors to note:
These figures make no adjustment for tax, which means they are primarily applicable to pension and ISA investments. If tax is taken into account, the gap narrows because UK dividends are effectively paid free of basic rate tax, whereas interest is fully taxable. Capital gains – when they occur – are also currently more generously taxed than income, although the new coalition government has indicated that it intends to increase CGT rates to ‘similar’ levels to those for income.
More importantly, the ‘Noughties’ were one of the worst ten-year periods for share investment on record. The EGS says that in the 101 periods of ten calendar years between 1899 and 2009, shares outperformed cash on 92 occasions. One reason for the disappointing 1999–2009 share returns was that the end of the millennium marked the peak of the technology boom for the UK stock market: the FTSE 100 began 2000 at 6930.2. Less than ten months before the end of the decade, the index was languishing at 3460.7 – almost exactly half its starting level.
The EGS shows that the longer the period under review, the more likely it is that shares will have outperformed cash. For example, across five-year periods, shares outperformed cash 75% of the time, but measured over 18-year periods, cash only outperformed 1% of the time. The better historic performance over longer timeframes makes sense: the longer you hold investments, the less significant short-term fluctuations become. Viewed over the full 110 years of the EGS data, shares outpaced cash by 4% a year on average after allowing for inflation.
Remember that no allowance is made in the EGS for investment costs (eg commissions, stamp duty and management fees), which can all have an impact on the performance of investments, especially those based on shares. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and your financial circumstances. Share investments do not include the same security of capital which is afforded with a deposit account. Past performance is not a reliable indicator of future performance.
The rewarding long view of investments
