Money market vs bonds: which is best?

Many DIY investors have given up on bonds. They’ve thrown their lot in with money market funds instead. I think that’s a mistake.

The evidence suggests that replacing bonds with money market holdings is liable to suppress portfolio returns and leave you under-diversified in the face of future stock market crashes.

Let’s see why.

Money market vs gilts: five-year returns

Our first comparison pits a money market ETF versus an intermediate gilts ETF in a cumulative nominal return head-to-head:

Investing returns sidebar – All ETF returns quoted are nominal, GBP total returns (including interest and fees). All asset class index returns are annual, inflation-adjusted, GBP total returns (including interest but not fees). ETF returns data and charts come from JustETF. Money market annual returns are from the Heriot-Watt / Institute and Faculty of Actuaries / ESCoE British Government Securities Database. Gilt annual returns are from JST Macrohistory1 and FTSE Russell. UK inflation statistics are from A Millennium of Macroeconomic Data for the UK and the ONS. May 2025.

Strewth, intermediate gilts lost 28.4% in the past five years! And that’s without trowelling on extra misery from inflation, which the data provider doesn’t incorporate into its graphs.

The real terms loss is more like 38%.2

So much for bonds’ reputation as a ‘safe’ asset.

The money market also inflicted a 9.6% real-terms loss too – but that’s only a quarter of the kicking meted out by bonds. One in the nuts rather than four-times in the nuts.

I find it easier to compare real annualised returns when assessing investments, so I’ll translate the ETF results into that format as we go. (I’ll use inflation-adjusted annual index returns to continue the match-up all the way back to 1870.)

Here’s the real annualised returns for the past five years:

• Money market: -2%
• Intermediate gilts (All stocks): -9.2%

Money market wins!

Money market vs gilts: ten-year returns

We’re supposed to care more about the long term, right? Our investing horizons ought to be counted in decades not a handful of years.

Let’s zoom out to the past ten years, the maximum time frame offered by most data houses:

Do I hear: “So you’re telling me that gilts lost money over the last ten years? I’m out.”

Meanwhile, money market funds – popularly billed as ‘cash’ – are up 15% in nominal terms.

(Incidentally, money market funds are ‘cash’ in the same respect that bonds are ‘safe’. Read that article for more.)

Real annualised ten-year returns:

• Money market: -1.5%
• Intermediate gilts (All stocks): -3.6%

Money market wins!

If you can call a loss winning.

Money market vs gilts: 15-year returns

Let’s keep going. If money market funds are the superior product then they should dominate beyond the last decade. Ten years is nothing much. We overweight its importance due to recency bias.

Well, this complicates the picture.

If you held both ETFs in equal measure for the past 15 years then your money did better in gilts – despite the enormous bond crash of 2022.

Real annualised 15-year returns:

• Money market: -1.8%
• Intermediate gilts (All stocks): -0.9%

Gilts win!

On this view, money market funds were twice as bad as gilts over the last 15 years.

Mind you, gilts still turned in a decade and a half of negative returns. Nobody comes out of this looking good.

Money market vs gilts: 18-year maximum ETF timeframe

The easily-accessible ETF data runs out around the 18-year mark. Money market funds are only lagging further behind at this stage:

Gilts returned 64% more than money market funds over the entire period that both asset classes became accessible via ETFs.

Real annualised 18-year returns:

• Money market: -1.4%
• Intermediate gilts (All stocks): -0.1%

Gilts win again!

True, 18 years worth of negative returns for both asset classes is a poor show. There’s no denying that.

Over the longer run though, they still both offer the expectation of a real-terms gain, which is why they have a place on our list of useful defensive diversifiers.

Thrive or dive

Money market returns were undone over the 18-year view by the period of near-zero interest rates triggered by the Global Financial Crisis (GFC).

Meanwhile gilts were scuppered by the abrupt return to interest rate ‘normality’ as central banks fought post-Covid inflation.

Lost decades happen. That’s the nature of risk.

We’ve documented such wilderness years for equities and gold:

• The Japanese stock market crash
• European stock market returns – check out the French! On second thoughts don’t. It’s too scary.
• UK and US bear market recovery times
• Is gold a good investment – including gold’s biggest market crash. Grim reading for gold bugs.

Nothing is ‘safe’. Every asset class can destroy wealth. That’s why the likes of shares offer you potential returns high enough to beat cash in the bank.

Because we can’t know which risks will materialise in the future, we diversify our portfolios by holdings assets that respond differently to varying conditions.

Not diversifying tempts fate like a farming monoculture. It works until it doesn’t and then failure can be catastrophic.

Keeping hold of what you have

It’s especially important to diversify your defensive, non-stock assets as your pot grows to a significant size. Preservation becomes as desirable as growth, psychologically, once you cross a certain threshold.

The growth side can still be adequately diversified by a single global tracker fund.

However defensive asset allocation is trickier, and neglected because it is complicated to execute, suffers from industry over-simplification, and is less well understood by the public at large.

To be fair, it’s not an easy problem to solve. I guess that’s why many people are throwing up their hands and dumping everything in money market funds.

But I digress.

Money market vs gilts: 125-year returns

Let’s finish off our money market versus gilts drag race. We don’t need to stop after 18 years. We can keep comparing bonds and money market returns all the way back to 1870.

If money markets really do beat govies then they’ll be back in the lead before long, eh?

Years	Money market real annualised returns (%)	Gilt real annualised returns (%)
20	-1	0.1
30	0.5	2.4
40	1.7	3.6
50	1.2	4
100	0.4	1.5
125	0.4	0.8

Turns out there is no truly long-run timeframe (beyond the past ten years) over which money markets beat government bonds.

Indeed gilts offer twice the reward of money markets if we take the 125-year average as a yardstick for expected returns, which is a reasonable thing to do.

If we were comparing equity returns, which asset class would you invest in? The one that did better over the last ten years? Or the one that delivered twice the return over the last 125?

Why is it different for money market funds versus bonds?

Why have bonds been cancelled?

The trouble is this happened only yesterday in our cultural memory:

The bond crash of 2022 rendered gilts toxic in the minds of many who lost money in it, or those who see its backwash polluting the trailing return figures. 

In contrast, money market funds came good over this short period. (Albeit after delivering 12 years of negative real returns in the previous 13 years.)

There’s a straightforward explanation for this reversal in fortune.

Steep interest rate rises (as per 2022) batter longer duration securities like intermediate gilts.

But they boost money market funds because such vehicles are chock full of short-term instruments that quickly benefit from higher rates.

Short versus long durations

The simplest analogy is fixed-term savings accounts.

If you knew interest rates were about to rise then you’d surely hold very short-term fixed savings accounts beforehand – or better yet, easy access. This way, once interest rates rose, you’d only have to wait a matter of days or weeks to switch your dosh to a bank account offering a plusher rate of return.

But what if interest rates were about to fall and stay down for years?

Then you’d want to lock up your money for as long as you could. You’d know the banks were about to pull their best offers and replace them with stingier ones.

Money market funds are the equivalent to easy access bank accounts in this analogy. They’re the fixed income place to be when interest rates rise, but the place not to be when they fall.

The rub though is that none of us know the trajectory of interest rates. Even the experts fail to predict the future path of interest rates with any reliability.

This is part of the reason why it makes sense to hold both bonds and money market funds. (Or straight spondoolicks instead of money market if you can squirrel enough away into cash ISA boltholes.)

The last five years of fixed income returns are dominated by a nasty sequence of interest rate hikes. Hence money markets won.

But the main event 17 years ago was unprecedented interest rate cuts to near-zero – intended to defibrillate Western economies in the wake of the GFC. Hence money markets lost.

Signal to noise ratio

Trailing returns are shaped by the events that they capture.

The shorter the time frame under review, the more likely it is to reveal only the singular events it records – while telling us little about the mean behaviour of the asset class.

Extraordinary events may not repeat in your future.

I was listening to a podcast recently that claimed business investment was suppressed in the 1950s because people assumed World War Three was all but inevitable given their recent experience.

The important thing about the 125-year record is it contains most of the information we’ve gathered to date on money market funds versus gilts.

Such data covers how each asset performed during two World Wars, two pandemics, one Great Depression, stagflation, the bursting of a tech bubble, plus multiple inflationary shocks, recoveries, go-go years, and interest rate cycles.

This long view tells us that gilts delivered much better average returns across the full spectrum of known economic conditions.

If you ever check past performance figures before investing, then this is the timeframe to care about – because if you’re playing the percentages, then 125 years is the most signal-rich comparison we have.

The underlying rationale

Financial theory helps explain why gilts should eventually reassert their return superiority over money market funds.

It’s that risk-reward trade-off again.

Gilts are the riskier asset in that they’re more volatile. Longer duration bonds can suffer violent reversals such as those seen in 2022. They also frequently deliver double-digit returns, for good or ill.

Double-digit gains and losses are comparatively rare for money market funds. They’re more stable, like cash.

But over time, there’s a price to pay for stability – a lower long-term rate of return. (Also known as cash drag.)

We invest in equities because they’re risky, not because they’re easy to live with. We want to pocket the greater reward that we can reasonably expect for taking this greater risk. Every DIY investor who knows what they’re doing has bought into this.

So why not with bonds?

Diversify your defences

My real argument isn’t pro bonds or money market funds.

I think there’s a case to be made for both.

How much you hold depends on who you are, your financial situation, and your time of life.

For accumulators, the biggest danger is you’re scared out of your wits and the market by a horrendous stock market crash. Intermediate government bonds better protect you against that fate than money markets.

Later in life, especially as a retiree, inflation is likely to be your fiercest foe.

Money market funds against inflation are like high city walls against early cannon. They’re not a good defence but they’re better than nothing. They typically outclass intermediate gilts in that situation.

Meanwhile, gold is an unreliable ally against inflation.

I personally think older investors should seriously consider allocations to individual index-linked gilts and / or commodities and / or gold.

That way you’re defended by multiple layers of fortifications when the inflationary enemy is at the gates.

Take it steady,

The Accumulator

1. Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298. [↩]
2. I use annual index returns to calculate inflation-adjusted returns. [↩]