I can get 4% on cash deposit now – why would I invest in the markets?

Investing vs Cash

Every year there is an investment winner. One ‘asset class’ that deliver better returns than all the rest. Cash is rarely that asset class.

It’s a conversation that comes up regularly in our client meetings and so I thought I’d do a little research. Here are my findings;I looked at returns from the main UK asset classes – equities (company shares), bonds, property, and cash, between 29th December 1989 and 12th May 2023 for the chart below.


A – The FTSE All Share – this is an index of the UKs top 350 companies by market capitalisation.

B – MSCI World – this is an index that represents large and mid-cap (medium sized) company performance across 23 global developed markets countries. It covers around 85% of the shares available to buy in each of the countries.

C – UK House Prices – England – the National Statistics index on house price data published by HM Land Registry.

D – Investment Association Sterling Corporate Bond – this demonstrates the returns from funds which invest at least 80% of their assets in Sterling denominated (or hedged back to Sterling), Triple BBB minus or above corporate bond securities.

E – Investment Association UK Gilts – this demonstrates the returns from funds which invest at least 95% of their assets in Sterling denominated (or hedged back to Sterling) government backed securities, with a rating the same or higher than that of the UK, with at least 80% invested in UK government securities (Gilts).

F – Bank of England Base Rate – this is the rate the Bank of England charges to other banks and lenders when they borrow money. To be commercial most banks won’t offer this rate to you, on instant access cash.

G – UK Consumer Price Index – an index of how a basket of UK goods increases between two periods, 12 months apart. Interestingly, the CPI only measures price changes, if people spend more because they buy more goods this is not reflected in the index.

I would have preferred to look back further, but the Consumer Price Index data was not available before the end of 1989. However, this is still 34 years’ worth of data – nearly my entire life so far and is a good sample of what could be expected if you did go further back, or projected forward into the future.

The overall winning asset class was the FTSE All Share, the index of listed companies in the UK. The cumulative return over the 34 years was 1,061.37% and so £100,000 invested at the beginning of the period would have become £1.06million – not bad at all!

For cash rates, I used the Bank of England Base Rate. Remember, you would be unlikely to obtain the Base Rate return on short term cash savings, but you may get close to it if you were prepared to fix your term for a year or longer. 

The return from cash over the same period was 251.54%. and so, your same £100,000 in cash would have become £251,540. (Both figures – for the FTSE All Share Return and the Bank of England return are before inflation.)

 Annualised return before inflationAnnualised return after inflation£100,000 return before inflation£100,000 return after inflation
FTSE All Share7.63%4.95%£1.06million£919,980
Bank of England Base Rate (Cash Proxy)3.84%1.16%£251,540£110,150
Table 1. Showing pre- and post- inflation returns for the FTSE All Share Index and Cash (the Bank of England Base Rate).

This is not to say that you should invest solely in the FTSE All Share – I’ve simply taken an index that people are familiar with to represent a broad UK investment. It’s also a proxy for investing in any diversified low-cost manner. The MSCI World index (a global index which includes the UK) has also provided far greater returns than cash over the long term.

The moral of the story is that cash never wins over the long term. With the rise in interest rates, UK Gilts and Bond returns have taken a tumble but are still well above cash returns over the period. 

Looking over the 34 years, cash was the best performer in only two of the 34 years – 1990 (just before a two-year recession) and 1994 (the global bond market crisis and a period of rising interest rates).

The FTSE All Share was best in 10 of the years.

The MSCI World was best in 11 of the years.

UK House Prices were best in 7 of the years.

UK Gilts were best in 3 of the years.

Sterling Corporate Bonds were best once.

Although rates on cash deposits looks attractive at present,  if you wanted to switch to cash and then switch back to investments how would you know when to do this and for how long? This is called market timing and is extremely difficult to do successfully.

(Sidebar – if I, or any other financial adviser knew how to time this even remotely successfully, then we wouldn’t be financial advisers, we’d be magicians  and relaxing on a beach somewhere with our billions!).

If you got your timing wrong (which you probably would!) and were not invested when the markets rose, it would have a devastating effect on your long term returns.The table below from Schroders shows the effect of missing out on some of the UK markets best returns:

Image 1 Original Source: https://www.schroders.com/en-gb/uk/intermediary/insights/time-in-the-market-not-timing-the-market-ftse/

The data is clear – you need to be in it to win it and the overall golden rule to remember during times like this – it’s time in the market, not timing the market.

I like to think of it as my train journey into Cannon Street. Compared to walking, getting a taxi, or taking the bus, the train is the fastest method and if all goes to plan my train journey is around 42 minutes (from mid-Kent). 

Sometimes, inexplicably (likely signal failures) the train slows down or comes to a complete temporary halt. If I could get off the train, would I be better off taking a different method of transportation to try and arrive at my destination quicker? The answer is very likely no. Once I had managed to find a bus or taxi and navigated the various traffic lights and congestion the train would likely have long ago restarted its journey or resumed its speed and arrived at the station, perhaps late but perhaps it was able to make up time. 

Getting off the train to walk would be akin to coming out of the market to invest in cash. You may feel like you are making progress because you are moving but you’ll never catch up to that train once it starts moving. Sometimes you just need to wait.There are some key times to consider holding cash – please see my colleague Charles Riches articles on the Cash Magic Formula for more information.

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