Savings accounts can outperform a FTSE 100 tracker


If you want to grow your wealth over the longer term, the traditional advice is to invest. But new research shows that you’re likely to do better if you put your money in a savings account than in a tracker fund.

What the research shows

The research, carried out by Paul Lewis, who’s the presenter of BBC Radio 4’s Moneybox programme, looked at how a FTSE 100 tracker fund performs over five-year periods between 1995 and 2016, compared to savings. In all cases, the returns took the charges into account that you’d have to pay if you invested in a FTSE 100 tracker.

He found:

  • If you’d put your money in the best buy one year savings account (and moved it to the best buy every 12 months), you’d do better than if you’d invested the money in a fund that tracked the FTSE 100 index in 57% of the 192 five-year periods that make up those 21 years. Whereas the tracker did better than cash in 43% of those periods.

SAVVY TIP: The research doesn’t take account of the fact that your savings would not be in a savings account for the entire year because you’d be transferring it from one account to another to continue to receive the best buy rate.

  • You would have lost money if you’d invested in a FTSE 100 tracker in up to a third of the periods from one to 11 years.
  • Over any five-year period between 1995 and 2015, there was a one in four chance that the investment would fall in value.
  • Over a nine or ten-year period, there was a one in ten chance that your investment would lose value.
  • If you’d kept your money in cash over the 21-year period (1995 to 2016), your average annual return from cash would have been 5% a year. Meanwhile, your average annual return from shares would have been 6% a year.

SAVVY TIP: The research assumed you’d invested through the HSBC FTSE 100 Index tracker and that you’d put your money in cash choosing the best buys for one-year savings accounts (sometimes called ‘bonds’) using Moneyfacts data. A FTSE 100 tracker was used because there was data available going back to 1995, which there wasn’t for other types of tracker.

Investing over a longer period

If you invest for ten years, rather than five, the FTSE 100 tracker fund does better than cash in 50% of the time and cash does better than shares in 50% of the time. Over 20 years, shares did better than cash 100% of the time; they did better than cash 81% of the time over 18 years and 88% of the time over 19 years. However, many people don’t invest for this length of time.

My view

I have never believed or said that five years is a reasonable minimum time to invest in shares or share-based funds. Some financial advisers take this view, but I don’t. I believe that you should invest for less than ten years. I also don’t believe that investing is the right option for everyone. If you are uncomfortable with the idea of your investments losing money, you shouldn’t invest. However, if you are comfortable with the idea of investing, and you can invest for the long term, investing could generate a better return. Just bear in mind it’s not guaranteed…

Useful links:

You can read the full research as carried out by Paul Lewis on his blog.

Related articles:

Employee share schemes – owning shares through your workplace

VIDEO: Dividends from shares explained

How to transfer your cash ISA

SavvyWoman email newsletters: If you found this information useful why not sign up now to receive free fortnightly email newsletters with money saving tips and help? You can sign up at the top of any page on the website and your details won’t be passed to any other company for marketing purposes.