I know I keep banging on about how investing in shares is the best form of investment ever, and how reinvesting dividends can make an enormous difference to your total returns. But even now, many years after I first learned of the Barclays Equity-Gilt Study, I’m still amazed at just how much better it is to buy shares than to save your cash in a bank account.
Wait, the Barclays what? It’s a survey that compares the returns from shares, from cash in a savings account, and from gilts, every year since 1899 — and you can’t get a much more of a long-term approach than that!
It’s understandable that people shun the stock market over fears of losing all and instead keep their money safely in a savings account, especially after the recent financial crisis and the turn-of-the-century dotcom boom and bust. But if you have a couple of decades or more ahead of you for your investments to mature, that could be a very costly mistake.
There certainly is more risk attached to buying shares in the short term, but the risk evens out over the long term — and the longer you have, the more the risk fades way.
What the folks at Barclays have been doing is comparing rolling periods from up to the present day — that’s the periods 2004-14, 2005-15, 2006-16, and so on. And what they discovered is that over all the rolling 10-year periods of the study, investing in shares beat saving in cash 91% of the time. So if you’re looking at a 10-year horizon, the odds are strongly stacked in your favour.
But a 9% chance of losing out to cash is still significant, so how about longer periods? Well, they only had to extend the rolling periods to 18 years to get a 99% chance of shares beating cash, and that’s surely enough for most people, isn’t it? If that’s still not enough to steady your nerves, we don’t need much more to settle the matter once and for all.
You see, when Barclays examined 23-year periods, they found that shares have never been beaten by cash — not even once. And that includes all periods spanning the banking crisis, the dotcom crash… and even the great 1929 crash that allegedly had investors throwing themselves out of tall buildings. And if that doesn’t convince you, well I give up.
Dividends make the difference
But what about those dividends? Investors always have the option to either take their dividends or to reinvest them for the long term, and it can be tempting to enjoy a bit of cash while your shares appreciate in value. In fact, if you’d invested £100 in the UK stock market in 1945 and spent all the dividends over the years, you’d still have a very nice £9,148 after adjusting for inflation — more than 90 times your original investment.
But if you’d reinvested all your dividends in buying new shares, you be sitting on an inflation-adjusted pot of… wait for it: £179,695!
It was Albert Einstein who famously said that “compound interest is the eighth wonder of the world“. And he wasn’t stupid.