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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. Gilt annual returns are from JST Macrohistory1 and FTSE Russell. Money market annual returns are from JST Macrohistory and the Heriot-Watt / Institute and Faculty of Actuaries / ESCoE British Government Securities Database. 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:

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?

YearsMoney market real annualised returns (%)Gilt real annualised returns (%)
20-10.1
300.52.4
401.73.6
501.24
1000.41.5
1250.40.8

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. []
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Our Weekend Reading logo

What caught my eye this week.

If you traveled back to the year 1900 and told people that, in 125 years, adults would live 30 years longer than they did, the late Victorians would be astonished—and likely envious.

Another three decades to work, rest, and play!

Think of all those extra Saturdays down the mines or in the sweatshop factories they’d enjoy. And all those extra lumps of coal for Christmas.

Well here we are in 2025 – expecting to live into our 80s and almost all with lives of far less physical hardship – and yet it’s rare to read a story about increasing longevity that isn’t tainted with doom.

I agree politicians would struggle to deliver a good news message about a population of older yet healthier citizens remaining productive for many more years. Disinformation is off the charts today.

And yet as Andrew Oxlade writes in This Is Money this week:

Research cited in the IMF’s World Economic Outlook, based on samples in 41 countries, suggested the average 70-year-old in 2022 had the same cognitive ability as a 53-year-old in 2000.

It is a remarkable improvement for such a short period. The report, published last month, suggested such improvements mean those employed at 70 see a 30 per cent uplift in earnings.

Oxlade explores the financial implications of longer and more productive lives. Like myself, he doesn’t see getting out of work entirely as always the best goal for most people – or even a possibility for many.

But having a decent Chasing Cows fund brings more than just an all-out card:

Optionality can help future-proof you from the stick of rising pension ages. And it is always good to have options, as you don’t know how you will feel about life and work in the future.

In any event it’s hard to see – and given the implications, you wouldn’t want to see – State pension ages not being higher in the future.

Still crazy after all these years

Indeed Denmark has just raised its retirement age to 70 – the highest in Europe.

The BBC reports:

Since 2006, Denmark has tied the official retirement age to life expectancy and has revised it every five years. It is currently 67 but will rise to 68 in 2030 and to 69 in 2035.

The retirement age at 70 will apply to all people born after 31 December 1970.

Meanwhile the age at which you can claim a UK state pension will start to rise again next year. It will hit 67 by March 2028.

I’m caught squarely by the move, unlike my co-blogger the wizened old Accumulator.  He’s just snuck under the wire.

Good for me! Personally I’ll be delighted at having to wait a couple more years to access my State pension if that’s the cost of having a few more years to enjoy this beautiful planet.

Cynics will retort that I say this from a position of privilege. I’ve got my (hard saved and carefully invested…) capital at my back. I don’t expect to retire into near-poverty after a hard life of earning nothing much.

That’s true. But firstly to some extent you make your own luck – we all understand around here the power of saving even small amounts over a lifetime. (Remember the Tin Can millionaire? He was Swedish, incidentally.)

Secondly, I’m not convinced that the happiest people are always those with the most money.

We all know counterexamples – people who seem to get by on little more than thin air with a relish for life – albeit I’d rather not take my chances with them!

Your mileage may vary. Fair enough. But do you really want to be thinking like the person quoted in The Guardian headline this week who called the pressure to delay retirement: “Ludicrous and unfair”?

From the article:

Although some thought the IMF’s idea was good, an overwhelming majority expressed outrage, typically describing the concept that older people should retire later to ease fiscal pressures as “disgusting”, “ludicrous” and “unfair”.

“Seventy is not the new 50. That’s propaganda,” said a 63-year-old NHS admin worker from Dundee. “Having worked since the age of 18, retirement cannot come soon enough for me. I find travelling for work stressful and long for a time when my days are my own. I am tired.”

For many more working class people, retirement will indeed be a relief.

But I question whether it will be the panacea they hope for, given they’re mostly going to be financially pressured, and that in at least some cases they lacked the imagination to see it coming for the past four decades.

It’s a great thing we’re living longer, healthier lives. Let’s plan for it and look forward to it.

Let’s invest as if we’ll make it to 100!

Have a great weekend.

[continue reading…]

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Time for the rubber to meet the road – or rather for the imaginary mouse clicks to meet a hypothetical online broker – as we ‘buy’ our The Living is Yield-y model portfolio for long-term income.

When I outlined in 5,000 oh-so-individually-essential words my rational for creating a model income portfolio last month, I wondered if I was setting it up just ahead of stock market crash.

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Investing for beginners: Risk versus reward

Investing lessons are in session

Back in lesson one, we looked at the main reason why we invest our money – which is to retain its spending power.

By keeping our money in a cash savings account and retaining the interest it generates over time, we can hope to at least keep up with inflation.

Hurrah! We’re not getting any poorer.

But we’re also not getting richer:

  • We’re only keeping track with inflation…
  • …and to do so, we can’t spend much – if any – of the interest earned.

Super-investors like Warren Buffett didn’t become multi-billionaires by saving into cash accounts.

In fact, it’s very hard to even retire comfortably if all we do is match inflation with our savings.

Please sir, can I have some more?

You need a savings pot of roughly £500,000 to generate an income of around £20,000 a year.

Let’s imagine you’re 40. You want to retire at 65, and you already have £100,000.

You can quickly calculate you might need to save at least £10,000 every year into your cash account to reach your £500,000 target1 in today’s money.

(Your pot by 65 in this example would be around £700,000. But remember: inflation will have eroded its spending power. So we’re assuming that £700,000 will only buy what £500,000 gets you today.)

Finding £10,000 a year in cash to save is very hard for most people. (It’s easier when using a pension, especially if your employer contributes.)

Ideally we want our money to work much harder to generate more of what we’ll need to enjoy a comfortable retirement.

Desperately seeking a better return than cash

The good news is there are plenty of other places we can put our money to work besides cash.

Examples: Corporate and government bonds, shares (equities), property, and gold.

The bad news is all of these options introduce new risks that we must take in order to have a shot at the potentially higher rewards they offer.

Cash is the only completely safe investment – and even it faces risks like bank crashes, or the risk that the interest we’re paid is inadequate to keep up with inflation.

Risk and return 101

Like a lot of investing, talk of risk and reward (i.e. the return you make on your money) can sound off-putting

But actually you’ll already understand the basics.

That’s because there are lots of different kinds of risk/return situations in everyday life:

  • The lottery – astronomical one-off odds that you’ll win (/return) a lot of money.
  • Learning to drive – the chance of an accident falls over time, but never to zero.
  • Tossing a coin – 50/50 chance each time. Over many tosses it averages out.
  • Russian roulette – ‘only’ a 1/6 chance of death at first. Rises to 6/6 eventually.2

Investing risk similarly comes in different shapes and sizes.

Risk and return three ways

Remember the smooth graph of returns from cash we saw in lesson one?

Let’s call it Graph A:

2.cash-return-time

Every year we have more money than before. That’s ideal, surely?

Well, compare it to the value of our investment over time in Graph B below – and pay attention to the ‘Y’-axis:

2.volatile.return

Graph B shows a much riskier investment. Risk here is synonymous with volatility – the value of this investment goes up (yay!) but also down (boo!)

You can see we even fell below our initial starting point for a while, before eventually coming good.

We endured this volatility for higher returns.

Things would have been very different if we’d cashed out early in year seven. We’d be down 40% on our starting capital.

That’s important: even when you invest for the long term, taking risks isn’t guaranteed to pay.

Introducing Graph C:

2.investment-goes-to-zero

This time things started well, but in year 13 disaster struck. We lost the lot!

(How? Perhaps we invested in a failed company like WeWork or Northern Rock, or a buy-to-let apartment that burned down without insurance.)

Risk versus reward

These various graphs reveal two key risks when investing:

  • Volatility – the risk of your investments going up and down in value.
  • Capital loss – the risk of permanently losing some or all your investment.

Which of the following three investments do you prefer?

  • Investment One goes up like Graph A for a final value of 150
  • Investment Two goes up and down like Graph B for a final value of 150
  • Investment Three bounces around even more than Graph B, before ending at 200

The sensible answer is to prefer Investment One to Investment Two. Why put up with sleepless nights from volatility for no extra reward in the end?

Investment Three might be worth it, provided you can take the volatility. But what if there’s a 10% chance of Graph C – a total wipeout?

And there’s the final snag. We don’t know what the graphs will look like in advance.

Hence we can never be sure how our returns will play out until the end.

Almost all investing decisions boil down to this interplay of risk and reward.

If something looks too good to be true, then you are probably not seeing all the risks.

Key takeaways

  • The safest investment (or asset) is cash.
  • There’s no point taking extra risk if you don’t expect a higher reward.
  • Risk can mean volatility.
  • But risk can also mean the chance of a permanent capital loss.

We’ll see as we go through this series that the best way to manage these risks is to diversify your money across different kinds of assets, to reflect your personal attitude towards risk and investment.

This is one of an occasional series on investing for beginners. Subscribe to get all our articles by email and you’ll never miss a lesson! Why not tell a friend?

  1. My simplified maths assumes a savings account paying 4% interest and 2% inflation over the 25 years, equating to a 2% real return. []
  2. Tip: if player five escapes unscathed, stop playing! []
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