Cash versus equities performance
However, the returns on equity-based investments are not guaranteed and the value of your money will rise and fall in line with the performance of the companies you're invested in.
If you only invest for a short period of time, it is entirely possible that you will lose money, but over longer periods history has repeatedly shown that equities grow faster than cash. If you were to plot your returns over 10 years on a graph you would see peaks – where the value of your investments is rising – and troughs, where it is falling. But over time it is likely that there will be more ups than downs and at the end of that decade you will have both more than you originally invested and more than you would have had if you had left your money in a savings account.
Barclays has conducted extensive research comparing real returns on cash – that is, with inflation taken into account – and equities stretching from the end of 1899 to the end of 2012.
The findings illustrate both the likelihood of equities beating cash and the benefits of holding investments for the long term. Over two years – the shortest period analysed – Barclays said there is a 67% chance that equities will outperform cash. With a 33% probability that cash will fare better, this still could be a sizeable risk for more cautious investors,
But as the holding period grows, so do the chances of equities beating cash. Over five years there is a 75% probability that equities will outperform cash, to 90% over 10 years. If you can invest for 18 years there is a 99% chance equities will beat cash.
How likely is it that equities will overperform cash?
|HOLDING PERIOD (YEARS)|
|Total number of years||112||111||110||109||104||96|
|Probability of equity outperformance||67%||69%||72%||74%||90%||99%|
Source: Barclays Research. Based on annualised real returns since 1899
To put these figures into context, if you invested £100 a month into a typical savings account you would have £12,305.79 after 10 years and £26,670.92 after 20 years, according to Morningstar. Whichever way you look at it, this is a tidy little nest egg, but it would be a lot more impressive if it had been invested in equities – that same £100 a month investment would be worth £19,594.66 after 10 years or £56,344.56 after 20.
In addition to the benefits of investing for the long term, these findings also demonstrate why it's important not to try and time the market. If you get too bogged down by the regular ups and downs, investing will invariably become a stressful experience and you run the risk of cashing your investment in just as the market picks up.
Accepting that there are periods when the value of your money will fall is part and parcel of becoming a calm, but successful investor.
With savings rates remaining at rock bottom and people more desperate than ever to generate a decent income, now could be the perfect time to look at the world of investing. Here’s our guide to all you need to know to check if you’re ready to invest in the stockmarket.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).