Will cash beat the FTSE 100 in 2016?

With it being tough to obtain a rate of more than 2% on cash savings, the return on cash in 2016 is likely to be very low. In fact, after tax has been deducted, the return could be a lot less than 2%. However, many investors will argue that there’s no risk with cash and that while the return will be low, it will still in all likelihood be ahead of inflation and is also a guaranteed return.

Moreover, with the FTSE 100 being up just 0.2% thus far in 2016, investors in cash are hardly missing out on a stunning return. Certainly, there’s a 4% dividend to add to that figure come the end of the year, but many investors may feel that when the FTSE 100’s risks are taken into account, cash is the better investment of the two at the present time.

Looking ahead, the FTSE 100 faces a number of major risks. Notably, the EU referendum is now less than a month away and there’s a distinct possibility that the UK will leave the EU. Nobody knows what the impact on the FTSE 100 will be, but with it bringing at least a degree of uncertainty regarding the UK and Europe’s financial future, it would be likely to at least cause investor sentiment to come under a degree of pressure.

Interest rate panic

In addition, the FTSE 100 faces the threat of a rising US interest rate. This could be a bigger problem than the EU referendum, since the last time the Federal Reserve increased interest rates, world stock markets went into panic. While that may not happen this time around, with rates having the potential to rise multiple times over the next year it could act as a brake on the FTSE 100’s performance.

Furthermore, a new US President is likely to cause further uncertainty among investors.And with the world’s second-largest economy, China, enduring a somewhat painful transition towards a greater consumer focus, there are numerous downside risks to the FTSE 100 in 2016.

As a result of the above, there’s a chance cash will outperform the FTSE 100 this year. However, in the long run shares have offered far superior performance to cash. In fact, since 1984 the FTSE 100 has returned 9% per annum, while cash has offered relatively disappointing rates of return. And with inflation likely to rise from its current low ebb and interest rates in the UK set to remain relatively low over the medium term, cash may struggle to even hold its value in real terms, never mind offer a generous return.

So, while the FTSE 100 could be in for a tough year, it has survived numerous crises in the past and consistently recorded strong growth. As such, it still appears to be a better asset to hold than cash for long-term investors.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.