COMMENT
This Is A Tracker's Market

By Maynard Paton (TMFMayn)
July 6, 2005

The property market has stagnated, cash in the bank remains as dull as ever and the stock market has rallied over 50% in two-and-a-bit years. Knowing how ordinary punters love to chase performance, I reckon index trackers will soon return to the investment spotlight.

To be frank, I feel nobody should have given up on trackers in the first place. Sure, the bear market of 2000-2003 knocked the confidence of many investors, but the FTSE's subsequent recovery suggests to me that 'the death of equities' was somewhat exaggerated! With the help of Credit Suisse First Boston, allow me to recap some of my favourite tracker stats.

First, here are the average one-year returns from shares and cash in the bank:

	Shares one-year nominal (%)	Shares one-year real (%)		Cash one-year nominal (%)	Cash one-year real (%)
Since 1869	9.3	6.3		4.7	1.7
Since 1918	11.4	7.4		5.4	1.6
Since 1945	12.2	6.2		6.8	1.1

(nominal=not adjusted for inflation; real=adjusted for inflation)

Second, here's how often shares have, on average, beaten cash over one-, three-, five-, ten-, twenty- and thirty-year periods:

	1 year	3 years	5 years	10 years	20 years	30 years
Since 1869
Periods	135	133	131	126	116	106
Shares beat cash	83	94	100	117	110	106
	62%	71%	76%	93%	95%	100%
Since 1918
Periods	86	84	82	77	67	57
Shares beat cash	53	61	64	74	64	57
	62%	73%	78%	96%	96%	100%
Since 1945
Periods	59	57	55	50	40	30
Shares beat cash	35	42	44	48	39	30
	60%	74%	80%	96%	98%	100%

Despite CSFB's numbers favouring shares heavily, I have to admit recent multi-year investments have fared badly. The stats indicate money invested in shares for three years at the start of 1999, 2000, 2001 or 2002, or for five years at the start of 1998, 1999 or 2000, would have reduced in value. However, monthly contributions to a tracker (and benefiting from 'pound-cost averaging') commencing at the late-1999 market peak would -- believe it or not -- by now have produced a positive return. Read more.

CSFB's stats also tell me the longer I invest in the market, the more likely I'll outrun cash in the bank. Going on history, the chances of my tracker beating cash over the next ten years are about 19 in 20. 

Reassuringly, when shares have underperformed cash over ten or more years, the difference has been minimal. According to CSFB, the last time cash beat shares over ten years occurred during 1969-1978, when shares lost out by 0.8% per annum. Over twenty years, the most recent occurrence of equities losing to cash was 1955-1974 (1974 being the end point of the worst bear market on record), when shares lost out by just 0.3% per annum.

Finally, I always like to reel this stat out, especially as I will reach retirement age in 2036: anybody holding shares over a thirty-year time span since 1869 has yet to suffer a negative return, lose out to inflation or lose out to cash in the bank! You can discover more about index trackers here.

More: Track Your Way To Wealth

Maynard contributes regularly to an index tracker and owns iShares FTSE 100, an exchange-traded fund that tracks the FTSE 100.