How to double the returns on your savings, and more!

Do you have some personal savings? Would you like to get a better long-term return on them?

If you have a plain savings account, you’re likely to be getting no more than 1.2% interest per year, with many variable rates coming in at only 1%. If you’re putting your money into a tax-exempt cash ISA, you’ll do a little better, but typical rates are still only 1.4% at best. With the Bank of England base rate at a low 0.5%, you might think that’s a reasonable deal — but you can do far better with a sufficiently long investment horizon.

I’m talking about shares. Some think of it as just gambling, but if you approach it as buying and holding small portions of the UK’s biggest and most profitable businesses, then it’s far more than that.

Short-term risk

Even with the tumultuous EU referendum uncertainty, if you’d invested in the FTSE 100 a year ago you’d be sitting on a return of around 3.5% including dividends — although over just 12 months you would have been facing significantly more risk, as the stock market often loses money over such a short period.

Over the past five years you’d have seen the value of your investment rise by about 23%, again including dividends, and over 10 years by about 40%. That’s better than the rates from a cash ISA, and it’s from one of the worst decades for the UK stock market in recent memory. So what does the longer term look like?

In its annual Equity-Gilt Study, Barclays has been comparing the returns from shares, cash, and gilts every year since 1899, and the results are eye-opening. Over rolling 10-year periods (that’s 2004-14, 2005-15, 2006-16, and so on), shares have beaten cash savings 91% of the time.

Long-term safety

You might not want to face that 9% risk of losing out, and that’s understandable. But we only have to extend the timescale to 18 years for shares to have beaten cash 99% of the time. And if we look at rolling 23-year periods, shares have never been beaten by cash. Not even in any of the 23-year periods spanning the great crash of 1929!

If you’re worried that the future may not echo the past (a valid concern), what we need to do is think about how these various investment returns relate to each other. The thing is, the interest paid on savings accounts isn’t conjured out of fresh air. No, it comes from the banks’ own investments, which ultimately depend on the performance of the businesses on which those investments are pinned. Ultimately, businesses (and shares in those businesses) are the only actual generators of real new wealth — and investments derived from them simply can’t beat shares of the businesses themselves in the long term.

Easy to do

Finally, many people are daunted by the prospect of setting up a broker account and choosing their shares, but it’s never been easier. A shares ISA is as easy to set up as a cash ISA or a savings account — the Fool’s own offerings are explained here (though other suppliers are available). And if you do no more than invest in a FTSE-100 tracker fund (which aims to emulate the entire index, usually with very low annual charges), you’ll be well on your way.

And as a final thought, if you’d invested £100 in the UK stock market in 1945 and reinvested your dividends in buying new shares, you be sitting on an inflation-adjusted pot of… £179,695!

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