Returns from cash have beaten shares so far this decade. But that’s fabulous news for today’s long-term stock market investors.
Last week a report was issued by Thomson-Reuters Lipper that said that returns from cash had beaten shares since the start of this decade. There is no hiding from this fact. The returns from shares in recent years have been, to put it semi-politely, pants.
This isn’t the first time in recent years cash has beaten shares however. Looking at other eight-year periods, cash beat shares from 1994-2002, 1995-2000 and 1996-2004 as well. There are a couple of important lessons we should learn from this.
1. It’s happened before and will again
Share prices reflect everybody’s expectations of how well companies will perform in the future and ultimately what dividends they will be able to pay out. These opinions change by the minute so shares prices tend to be very volatile. They certainly don’t go up in a nice smooth line, year after year after year.
This is crucial to understanding the case for investing in shares. I never cease to be surprised that many people expect their investments to perform in the same fashion as their savings and that any short-term decline is deemed as a failure rather than just part of the process.
There are always going to be periods when cash does better than shares. It’s inescapable. As I said at the beginning, we’ve had four such eight-year periods in recent times (1994-2002, 1995-2000, 1996-2004 and 1999-2007) . Going back further, we have four periods in the 1970s when there was a similar pattern of cash beating shares (1966-1974, 1968-1976, 1971-1979 and 1972-1980).
However, there are no other instances of cash beating shares over an eight-year period going back to the 1920s. Since the 20s we’ve have 80 eight-year periods and 10% of them have seen cash beat shares. So while the current situation is quite rare, it is certainly not unprecedented.
However, the longer you invest for, the rarer these periods become as this table shows.
Periods since 1918 | Times cash has
beaten shares | % |
1 year | 33 | 37% |
3 years | 23 | 26% |
5 years | 17 | 20% |
8 years | 8 | 10% |
10 years | 2 | 2.5% |
Five years is often stated as the minimum timeframe for an investment. However, even over this sort of period there has historically been a 20% chance that you would have been better off in cash. Double that period to 10 years and there has only been a 2.5% chance. So the longer you invest for, the better your chances of getting decent returns.
2. It’s a good time to invest now
While it’s interesting to see whether shares have done well over the last eight years, personally I am much more interested in the next eight years. This takes us onto the second important lesson and that is the best time to invest in an asset is often just after it’s had a poor run of returns.
After the poor performance in the 1970s, with those four eight-year periods where cash beat shares, the stock market went on a 20-year bull run. Over these two decades the UK stock market rose more than 20 times with dividends reinvested. Keeping money in savings account over these two decades would have seen you enjoy a gain of just 6 times.
Likewise one of the best periods to invest in UK property was after the slump from 1991 to 1995. We then had twelve years of good gains after that. However, most people will only invest in something when it’s had a period of good returns and they will instantly dismiss anything that hasn’t done well recently.
While it’s impossible to tell when any sort of market will turn, I believe the odds are excellent that money invested in the stock market over the next couple of years will turn out to be a very sound long-term decision.
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