What’s the best balance for your investment portfolio?
In the complicated maze of personal finance, we’d always discourage the simplistic outlook of the major decision being between cash and shares – not least of all as a peer-to-peer lending platform. But with the lion’s share of UK savers and investors’ money being put into these two asset classes, it is certainly pertinent to compare the two.
It also gives added context to the remarkable finding by BBC Money Box presenter Paul Lewis, whose 21-year research has revealed that returns on best-buy savings accounts in the UK have largely outstripped those from the stock market over most investment periods since 1995.
Clearly, such findings defy conventional wisdom, which suggests that for those with some appetite for risk, greater returns are to be had on the stock market. Compounding this, rates on various types of savings accounts have plummeted since the recession which, given that this constitutes roughly a third of the given timeframe of the study, would have surely impacted negatively on the average returns from best-buy accounts. Yet it wasn’t enough to deny ‘the dough’ victory.
What the research found
The study compared the performance of the best one-year deposit accounts each year since 1995 with that of a basic tracker fund reflecting the top-100 shares on the London stock market – taking into account the gains from compound interest/reinvested dividends in each case. The cash option, which assumed that the saver was nimble enough to switch to the optimal account at the end of each year, outperformed the tracker fund 57 per cent of the time in a series of 192 rolling five-year periods.
When these rolling periods were increased to 14 years, cash performed overwhelmingly better than the tracker fund, winning the battle a staggering 96 per cent of the time across 84 of these timeframes.
Interestingly, Lewis also found that when analysing the performance of tracker funds over investment periods ranging from one to 11 years, they actually lost money a third of the time. Cash savings, in turn, are obviously guaranteed to a large extent. In fairness, when looking at the 21-year period in its entirety, shares (6 per cent) did have the edge over savings (5 per cent) in terms of overall compound return – but only by the negligible margin of 1 per cent, thus bringing into question the worth of the added risk involved.
So what does it all mean for investors and savers?
It’s worth noting that the very nature of the research is that it is based squarely on past performance, and thus won’t necessarily reflect how things would play out in the future.
And the above shouldn’t be taken as a ringing endorsement of cash portfolios either. In fact, for savers looking at best rates on monthly interest accounts, the best you’ll find at the moment is a derisory 1.25 per cent, which equates to just £10.40 in interest each month if you were to put down a cash sum of £10,000. For those willing to commit their funds for two-years in a monthly interest account on the high street, 1.79 per cent is as good as it will get.
You’ll have to forgive the opportunism, but these findings - particularly the collective returns over the 21-year cycle – bring into sharp focus the merits of peer-to-peer lending (P2P). It is important to once again underscore that returns are not guaranteed, but at the same time, no lender has ever lost a penny through our platform, and our rates over three and five-year periods would clearly eclipse the respective equivalents of savings and shares in such timeframes based on the above.
Although our platform is only two-and-a-half years old, the industry itself was alive and well during the downturn at the end of the last decade, and, with the credit performance of the P2P industry significantly outperforming traditional lenders throughout the turbulent period following 2007/08, it’s fair to say that it coped well enough and has endured some degree of stress testing.
Deciding on your own portfolio
Every investment choice is contingent upon risk and reward, and for the risk averse, there should at least be some encouragement from the study that being savvy and mobile with your savings, and switching to best-buy accounts at every opportunity can produce a decent yield.
For those with a greater risk appetite and/or a willing to lock their money away for longer, the findings should once again underline the gaping hole being filled by peer-to-peer lending as a midpoint between savings and investment. And, in the context of diversification, P2P makes a strong case for being part of any portfolio. Clearly, someone who simply invests in the FTSE 100 (as this study effectively assumes) is taking on a large amount of risk, and spurning the opportunity to benefit from hedging their bets on other options – both within this asset class and alternate investment types.
Either way, the fact that the assessment of risk and reward is entirely a personal choice remains unchanged. All we can advocate is that should you wish to go beyond relying purely on savings, diversification of your portfolio as far as possible gives you the best chance of maximising your return.
Main image "Vintage Investing" by Chris Potter/StockMonkeys.com. Image subject to copyright. A link to the image and appropriate licence can be found here. You must not use or reproduce this image other than in accordance with the licence.
- The formidable power of compound interest
- Will we live in a country of negative interest rates?
- The rise of challenger banks
- Quick guide to the Personal Savings Allowance
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Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
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