Real returns of savings v investments

cepheus

I've been comparing the historic savings rates quoted on this site with the absolute returns of equities (capital growth+yield), after adjusting for RPI inflation.

http://www.entrans.co.uk/spreadsheets/estimate of no risk savings rate.xls

I have assumed it is possible to attain 1% better than the average savings rate, and it is possible to change to 1% above RPI, although it is only during the last year it would be worth it.

The FTSE 100 absolute return data starts at 1995 on the data available to me on sharescope, hence the comparison only starts then. (The last year is estimated since I have discontinued this service). Ignore the figures before then for the time being.

The other index included is the MSCI world index. This is presumably based on all the local currencies and still needs to be converted to Sterling to be meaningful. I'm not sure if there is a weighted sterling index I could use for this.

Could anyone improve on this data, for example by including the best savings rates rather than just assuming a 1% enhancement on the average?

Would it have been possible to protect savings against inflation in the past before index linked savings certificates became available?

Reaper

From a brief look a couple of things spring to mind:
1) I think your savings account rates are gross, whereas net of basic rate tax would give a more realistic figure.
2) The FTSE 100 is not a great indicator as it has under performed the rest of the market for a long time now. I would suggest an average of the FTSE 100 and FTSE 250, and maybe even the FTSE SmallCap.

cepheus

Yes I agree with the second point, but do you have the figures?

Regarding tax are you saying equities are more likely to be tax free than cash? Shares or cash can be tax free or not depending on the wrapper and tax band. For large amounts I guess what you say is correct though.

Rollinghome

Very interesting numbers and despite the complications is probably far more useful than the figures often quoted from the Barclays Equity Gilt study which bizarrely uses the Nationwide InvestDirect account, paying 0.20% gross, as the return on cash but for the return on equities ignores all trading costs and charges.

I think getting definitive figures for achievable interest rates could be difficult when some people would have locked into top fixed rates at just the right time and others not. Differential taxation is difficult as are investment costs which could range between directly held equities and trackers to the most costly managed unit trusts.

Linton

cepheus wrote: »

Yes I agree with the second point, but do you have the figures?

Regarding tax are you saying equities are more likely to be tax free than cash? Shares or cash can be tax free or not depending on the wrapper and tax band. For large amounts I guess what you say is correct though.

Return from equities is taxed at a much lower rate than interest income which is charged as income. So unless your total income is less than the basic allowance you will have to pay at 20% or 40% or more.

Dividends are tax free unless your total income puts you into a higher rate tax band. Even then you are only charged at the marginal higher rate (20%).

Tax on equity profits is tax free unless you exceed the CGT limit of £10600 on realised profits. You should be able to avoid this by judicious regular selling and buying different equities.

cepheus

Well what I meant is that you could build up a sum in cash ISAS and tax free NS&I. ISAs might restrict your options. On the other hand some offer a bonus to swap ISAs

The current ones on offer.

Best Buys: Top ISAs

• Easy access ISAs:
• 3.3% AER: Open-to-all, tracks base rate 3.35% AER: Top rate, but doesn't track3% AER: Allows transfers, min £1
• Lock cash away:
• 3.7% AER: Fixed for 2 years
• 4.22% AER: Fixed for 3 years
• Inflation linked: RPI + 2% over 5 yrs

It's rather untypical at the moment though with low interest rates and high inflation. Shame you can't swap between ISAs and NS&I index linked and back again for larger amounts

Reaper

cepheus wrote: »

Yes I agree with the second point, but do you have the figures?

I see what you mean. They are not commonly available as I would have assumed. The best I could do was 10 years worth here:
http://uk.finance.yahoo.com/q/hp?s=^FTMC&a=00&b=1&c=2000&d=04&e=13&f=2011&g=m&z=66&y=132
Not sure if the link will work directly. You may have to select monthly and fill in the dates.

Regarding tax are you saying equities are more likely to be tax free than cash? Shares or cash can be tax free or not depending on the wrapper and tax band. For large amounts I guess what you say is correct though.

It depends who you are aiming at but I would say the average person pays basic rate tax on their savings but zero Capital Gains Tax even if they have investments. Just the dividends get taxed at a low rate.

cepheus

Feel free to copy and produce your own version which suits your circumstances. I believe however there is a 10% tax on share dividends even in an ISA. Whilst outside the ISA

Dividend tax rates 2011-12

Dividend income in relation to the basic rate or higher rate tax bands Tax rate applied after deduction of Personal Allowance and any Blind Person's Allowance

Dividend income at or below the £35,000 basic rate tax limit 10%

Dividend income at or below the £150,000 higher rate tax limit 32.5%

Dividend income above the higher rate tax limit 42.5%

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnSavingsAndInvestments/DG_4016453

I'm not sure if the 10% is allowed for in the FTSE100 total return figures. Remember a considerable proportion of returns is through dividends.

Of course most people pay the equivalent of a tax with equity/fund accounts though the various fees.

Xbigman

Comparing returns with the stock market is fraught with problems. The biggest problem is the start date. Choose a start date just before a crash and the returns look poor. Choose a start date just after a crash and the returns are greatly inflated. Its a favourite trick of advertisers to come up with high returns for 5 years of whatever product they are pushing, advertising that appears just over 5 years after a crash.

Is the market currently undervalued, fair value or over valued?
What was the return if you start from the last time the market was [insert your assessment of current overall market valuation].

Cash savings. Past performance is useless. What are the rates of return now? What will happen over the coming years (the same timescale you plan to invest for). That gives you your comparison and thats where the figures become usefull.

If you are just after after interesting historical data thats fine. But its not likely to be usefull in itself.



X

cepheus

Xbigman wrote: »

Comparing returns with the stock market is fraught with problems. The biggest problem is the start date. Choose a start date just before a crash and the returns look poor. Choose a start date just after a crash and the returns are greatly inflated.

Indeed it is, in this case the start date is determined by the availability of data. The problem of start date is less critical for much longer intervals. Then how do we know that present growth potential is in any way similar to a hundred years ago!

Your post is just a general obvious claim that we can't predict the future from the past. However, this also questions if we can expect any long term returns from the stockmarket at all, but everyone seems to assume so.

The point is we have to base our 'investment' decisions on something. So if history suggests that the long term market return was only 3% and charges reduce this to 1% per annum then perhaps a savings account (or some market instrument hedged against those assuming a higher rate) might be a better bet?

However, it is more than 6% isn't it? Well here is another reality check. Only one market has managed anywhere near that sort of return long term, the US one. That may be the benchmark, but that is exactly what we would expect due to market survivorship. This is another problem for calculating market indices from individual stocks as well.

And what of the typical market; a measly 1.5% according to this (before charges). Makes you think doesn't it?

We find that the United States has by far the highest uninterrupted real rate of appreciation of all countries, at about 5 percent annually. For other countries, the median real appreciation rate is about 1.5 percent. The high return premium obtained for U.S. equities therefore appears to be the exception rather than the rule

Global Stockmarkets of the 20th century Philippe Jorion and William N. Goetzmann*http://www.nber.org/papers/w5901
http://efinance.org.cn/cn/fm/Global Stock Markets in the Twentieth Century.pdf

cepheus

Here's another interesting comparison of asset classes. Bet you Gold hasn't performed well long term though!



http://www.bbc.co.uk/news/business-13156756