Avoid the 5 worst money mistakes: 2. Don’t believe the Barclays ‘shares outperform cash’ lie

If it were the case that cash (money held in a bank) usually outperformed shares (either shares held directly by savers or held by unit trusts and pension funds) then most of us would be much better off leaving our savings in a bank rather than investing in stock markets, unit trusts, bonds, ETFs or whatever. But this would also mean that most of Britain’s 28,000 supposedly “independent” financial advisers (IFAs) and many tens of thousands of bank ‘financial advisers’ (salespeople) would be out of a job. Those who want us to hand our money over to them are constantly repeating the mantra that ‘over the longer term, shares outperform cash’. There is only one small problem – it’s not true!

I have always believed the ‘shares outperform cash’ story till I read the excellent free book Monkey with a Pin. The data used to justify claiming ‘shares outperform cash’ is usually the Barclays Equity Gilt Study. We have now learnt that anything with the Barclays name attached should be treated with the utmost caution. When comparing the returns on shares and cash, Barclays don’t look at the interest we would get from 2- and 3-year higher interest bank and building society accounts. Instead Barclays use UK Government Treasury Bills as what they call ‘cash’. These Treasury Bills are not available to ordinary savers like you and me, so to use them as a proxy for ‘cash’ is ridiculous. Moreover, the interest paid by 2-and 3-year higher interest deposit accounts is almost always much higher than Government Treasury Bills. At the moment, a higher interest bank account will pay around 3.5%, seven times more than the 0.5% from Government Treasury Bills. In the past, the gap has not been so huge, but returns from 2- to 3-year deposit accounts have always been higher than Treasury Bills.

If Barclays used the average interest paid by 2-and 3-year higher interest bank accounts, then for 80 of the last 100 years, cash would have easily outperformed shares. There was just a brief period of 20 years (the 1980s and 1990s) when shares outperformed cash. This was because of a flood of baby-boomer savings into unit trusts and pension funds. As the baby-boomers retire and their money gets taken out of shares and pension funds, we can expect falls in share prices. And, of course, Barclays don’t take account of the £150m a day we savers pay in fees, commissions and many other charges to IFAs, unit trust bosses and pension fund managers.

One of Barclays’ most profitable units is Barclays Wealth which invests money for clients with six- or seven-figure amounts. If these people were to discover that cash outperforms shares, then all the highly-paid, highly-bonused staff at Barclays Wealth would be toast, so Barclays continues with its ‘shares outperform cash’ lie.