Good reads from around the Web.
I have often sung the virtues of cash [1], which – despite my love affair with shares – I consider the king of the asset classes [2].
For example, I have been happy to suggest new investors start [3] with a 50/50 cash and share portfolio, rather than bothering with bonds. And I have commented many times over the years that the official historical record [4] underplays the benefits of cash as an asset class, because it considers cash from a stodgy institutional perspective, rather than that of a rate-tarting Monevator reader.
I’ve even argued with a certain UK blogger – an online chum who has long hated the stuff [5], and believes it’s a zero-gain asset after inflation – that cash can sometimes clean up, especially when you’re actively seeking the best rates. (We had that friendly tiff the last time research appeared showing that actually, cash could be surprisingly competitive).
Even my co-blogger is a secret rate tart [6], despite his feeling that we’re best-off assembling our portfolios with the more traditional building bricks of bonds [7].
So I wasn’t particular surprised this week when readers started pointing me towards research from Paul Lewis, the presenter of the BBC’s Moneybox program, that showed cash had beaten shares over various periods of time.
Making a splash via the FT [8] [search result] and also writing on his own blog [9], Lewis stated:
Money in best-buy cash savings accounts produced a higher return than a FTSE 100 tracker over the majority of investment periods from 1995.
Money put into “active cash” beat the total returns from the tracker in 57 per cent of the 192 five-year periods beginning each month from 1 January 1995 to the end of 2015. No account is taken of inflation, which affects money in cash or in shares equally.
For longer periods, the difference was even more marked. In investments made over the 84 14-year periods from 1995 to 2015, cash beat shares 96 per cent of the time.
Only periods of 18 years or more showed shares outperforming cash more often than not. But assuming you can find 20 minutes a year to search for the best rate and move your money over a shorter period cash really can be king.
There’s more to his piece than that, and I obviously can’t excerpt it all here – please follow the links above for more on his methodology and findings.
It’s also worth noting that even he concludes:
Cash, of course, is not for everyone in all circumstances.
Over long periods, a simple share index tracker is probably best.
However that isn’t the headline of the article, and it’s certainly not the impression people were taking away from his piece.
Why bother with shares when you can do better with good old cash? That was the more appealing message.
Dash for cash?
If cash did deliver superior returns to investing in equities over most periods then there’d be absolutely no point in bothering with the ups, downs, and uncertainties of shares.
Indeed that would be the conclusion of most of us even if cash moderately under-performed.
An easy and stress-free life in the safety [10] of cash earning say 6% would beat the scary and potentially ill-fated pursuit of say 7% any day.
But I don’t believe that’s what Lewis’ research really suggests, even on its own terms – and moreover that its own terms miss the bigger picture.
As Merryn Somerset-Webb – writing in the FT [11] [search result] in a good piece that was annoyingly published just after I’d finished mentally drafting this one – Lewis’ comparison is a stretch:
Mr Lewis’s research makes an important behavioural assumption: that investors are too supine to move from the HSBC FTSE 100 tracker he uses for the comparison for the entire 21 years in question, but that savers have the energy to move to the best-buy account on the market every single year.
That makes his comparison a little bit apples and oranges: a lazy and utterly uninquisitive equity investor takes on a fantastically energetic and research-oriented cash depositor.
The FTSE 100 has been a dud of a market for decades. In the past I’ve considered it a good starter to get people comfortable with equity investing (although these days I am pointing friends who ask towards Vanguard’s LifeStrategy funds and other global trackers) [12] but nobody should have it as their entire portfolio for Lewis’ 21-year period.
A better comparison would be with an investor with a properly diversified [13] and regularly re-balanced portfolio that had money invested in other risk assets such as the US, Europe, Japan and the emerging markets, and property, bonds, and gold – as opposed to just one relatively odd index that has been through two deep bear markets during the period and has recently suffered from its skewed weightings towards commodities and banks.
Of course you might argue that during other times the FTSE 100 might benefit from its exposure to those sectors, but that brings me to my second big beef.
Lewis writes on his blog that:
“For a cautious person investing for periods of up to 20 years this research indicates that well managed active cash beat a FTSE100 tracker more often than not.”
But that is not what his research shows, in my opinion.
What he has pointed out – and as I said at the top, I think it’s worth pointing out – is that over a specific 20-year period from 1995 to 2015, cash has done well against the UK’s main market, and that you don’t hear much about that from the fund management industry.
But this is just one 20-year period out of, well, at least a hundred you could reasonably compare it to.
Lewis does analyze smaller multi-year periods in his research, but they are all from within that same two-decade block.
And why start in 1995 anyway? Why 20 years? Why not 23 years, or 17?
I wouldn’t be too hard on this – all looking backwards must by necessity have constraints – but equally I wouldn’t make too bold assumptions based on what I found.
It would in my view be foolish to turn your back on shares and their demonstrably superior returns [4] over the past 100-odd years based on just this last 20-year period – not least when that period was marked out by banking craziness that put growth ahead of profits, and thus might lead you to suspect that the Best Buy booty we saw in the past might not lie in our future.
Lowly yielding world
On that last point, I’m not quite as bothered as some of Lewis’ critics by today’s low interest rates versus those he studied.
As I say, I think it’s quite possible that because of the beanfest that was consumer banking before the crisis, Best Buy rates were too generous back then and won’t be so in the future.
But when it comes to the wider low-yield world we seem to live in, there are two contrasting interpretations as to what it means for shares.
The optimistic view for equity investors – and the one I’ve tended to lean to – is that low rates on cash and bonds are mainly reflective of severe risk aversion among investors, and also of the artificial, remedial action (low rates and QE) taken by Central Banks to avoid the banking system going bust.
Through this lens shares might be a bargain, because it could mean they are not relatively cheap compared to cash and bonds for any good reason except that people are scared of them.
However the other interpretation – which is surely at least half-right – is that low yields are reflective of a wounded, over-indebted global economy that will take many more years to get over the after-affects of the credit crunch.
If that’s true then shares only offer the seeming potential for higher returns (via higher dividend yields, say) because they are more risky. Their apparent cheapness could be because they are pricing in the possibility that those dividends will be cut in the face of more economic shocks.
We could debate this all weekend. The point is that you can’t really say “cash only pays 1.5% these days but shares have delivered 10% over the long-term” without at least considering that your projected 10% figure might be far too high too in today’s low-yield world.
So Lewis gets a pass from me on that complaint.
Digging into the data
A last and more niggly point is that in explaining his workings, Lewis highlights a laundry list of caveats [14].
Each one he says doesn’t really change the results – but what if they were all added up together?
For instance, he ignores tax despite using Best Buy interest rates that were available only on taxable accounts (as opposed to ISAs). He ignores the time lag affect of moving your money every year. I also wonder about the veracity of data systemically taken from the January issue of magazine that would have been physically written and printed in the prior month?
Again, I don’t want to come across as too harsh on his piece.
On the contrary I applaud Lewis for doing the research – I haven’t got the resources to do any better job here – and I think his main points about the benefits of seeking the best interest rate on cash, the non-trivial risk of losing money in shares, and that the vested interests of the finance industry will usually encourage you into products that make it money are all worthwhile.
However I wouldn’t start pretending you can enjoy equity-like returns from the comfort of cash indefinitely. As he himself says, cash should not be the main driver of any truly long-term strategy.
- If you want to read more, don’t forget Merryn Somerset-Webb’s article I linked to above.
- Lewis’ research was also picked up by ThisIsMoney [15], which among other things features a Hargreaves Lansdown [16] analyst rather predictably comparing cash to a top-performing active fund, as well as more reasonably highlighting what he claims is the slight edge of the average UK fund over the FTSE during the period. (Perhaps true, but many UK active funds have enjoyed a big boost in recent years by being very underweight the commodity sector. Will this last? Also beware of survivorship bias, where dud funds that were shut down may have been stripped from the data).
- The Guardian [17] was rather bowled over by the research.
Have a great weekend!
From the blogs
Making good use of the things that we find…
Passive investing
- 10 things I believe about investing – A Wealth of Common Sense [18]
- Reversal of fortune for all 2010’s top fund managers [Tweet] – Meb Faber [19]
- Vanguard’s active funds haven’t outperformed – IFA.com [20]
- Why passive investing boosts corporate activism – Wharton [21]
- Smart Beta is more expensive and introduces risk – Dual Momentum [22]
Active investing
- Yesterday’s strategies from investment gurus – Oddball Stocks [23]
- Income investors’ growth bias is an opportunity – The Value Perspective [24]
- How Norway’s Warren Buffett built a $2 billion fortune – Marketwatch [25]
- Be aware of the capital investment cycle – UK Value Investor [26]
- Sector surfing is performance chasing – The Reformed Broker [27]
- Learning from mistakes – What I Learned On Wall Street [28]
Other articles
- The worst mutual fund in history – Dividend Growth Investor [29]
- Insider trading: Hot tips to make you rich – Under the Money Tree [30]
- Compare your spending with the rest of the UK [Tool] – MBNA [31]
- P2P: A warning from the richest man in Babylon – The Escape Artist [32]
- Retirement amplifies bear market fears – SexHealthMoneyDeath [33]
- An introduction to The House Crowd – The FIREStarter [34]
Product of the week: The mortgage giants are cutting rates ahead of a potential Brexit rate plunge, reckons ThisIsMoney [35]. Both Halifax [36] and Nationwide [37] have slashed rates across the waterfront; you can now get a 10-year fixed rate mortgage from Nationwide that charges just 2.99%. Gulp.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1 [38]
Passive investing
- How the financial services industry feeds itself first – Guardian [39]
- Investors underperform everything – Morningstar [40]
- Millennials go passive, but are still too confident – ThisIsMoney [41]
- Mad money. Questionable ethics – Huffington Post [42]
Active investing
- Lloyds bondholders lose final battle in Supreme Court – Telegraph [43]
- Will Google or Facebook buy Twitter? – Vanity Fair [44]
A word from a broker
- Gilt yields are at record lows. What’s next? – Hargreaves Lansdown [45]
- US equities: Large cap versus small cap – TD Direct [46]
EU Referendum: Make your mind up time
- A reading list of the best pro/anti-Brexit articles – ThisIsMoney [47]
- Will Brexit bring UK property doom or property boom? [Search result] – FT [48]
- Nutmeg has cut risk exposure ahead of EU Vote – Telegraph [49]
- The Guardian’s finance editor is voting to leave the EU… – Guardian [50]
- …but FT’s former PF editor foresees gloom in a Brexit [Search result] – FT [51]
Other stuff worth reading
- Millennials set to embrace micro-investing [Search result] – FT [52]
- £37,000 temporarily “disappeared” during ISA transfer – Telegraph [53]
- Should you only buy or sell funds in the morning? – Telegraph [54]
- Developers are offering incentives to shift London flats – Guardian [55]
- Bit of a hatchet job on the on-demand economy, but interesting – Guardian [56]
- Fintech’s DIY problem [Search result] – FT [57]
- How and why you should hire “originals” – FirstRound [58] [H/T AR [59]]
Book of the week: If you liked the piece on the Norwegian super-investor, you might like the authors’ longer book, Concentrated Investing [60]. It profiles value investors who bet big on their best ideas. I’ve not read it yet. I might!
Like these links? Subscribe [61] to get them every week.
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩ [65]]