Is your Cash ISA a wasted opportunity?

[GeorgePizarro]

The number of people with Cash ISAs has fallen by 3.8 million since the 2008 financial crisis as more and more people start to realise that keeping their savings in cash gives them a negative real return. This is because the rate of inflation has mostly been above the interest rate paid on Cash ISA accounts during the last decade.

 

It is worth pointing out that if you plan to use cash for intended purchases, or require a buffer for those unfortunate and unexpected outlays, it is likely that holding cash or investing in a very low volatility fund is the sensible thing to do.

 

However If you have a longer term investment horizon (+3 years), the majority of people should look to invest in a diversified portfolio containing a mix of equities, fixed income and alternative investments such as gold.

 

As you can see from the chart below, even if you had been very unlucky and invested just before the 2008 financial crisis; an investment of £20,000 in a balanced portfolio would now be worth around £37,000 today. If you had opted for a Cash ISA, your savings would have grown to just £25,000.

 

 

If you have any good stats to support this claim or if you disagree please post these below.

[rimmy2000]

that is interesting, how is the 'balanced portfolio' defined, in this chart? also it is worth just honing in that the balanced portfolio dropped by about £5,000 between 2008 - 2009, which would have freaked out a lot of people whilst cash held still rose in this period. Suggests mid 2009 would have been the right time to switch from cash to shares. although hindsight means we would not know this at the time.

 

I ask about the balanced portfolio constituents because it would be interesting to see how this correlates with an index, like the ftse100/250.

[PandaFace]

I guess they didn’t want to take the absolute BEST scenario, and instead have shown that even at the worst case (just before the crash) tracker funds are still far better. A 25% loss would be hard to deal with for 3 years tho. I wonder what the gain would look like if you had got in at the bottom...

 

This reminds me of that warren Buffett bet where he bet an index tracker would be cheaper and higher rate of returns over a managed portfolio. I don’t have a link but will post when of mobile.

 

 

[IGSam]

Hi

 

For this ‘Balanced’ portfolio I used three instruments. The weight in the portfolio given to each is given too...

 

1. 48% - Developed market equities (MSCI World Net Total Return Index)
2. 48% - UK government bonds (FTSE Actuaries UK Conventional Gilts Total Return Index)
3. 4% - Gold (LMBA Gold Price)

I crunched the numbers for you and over this period the FTSE 100 returned 84% while the FTSE 250 grew by 169%. In comparison, the ‘Balanced’ portfolio I constructed using the 3 indices above was up 82%, extremely close to the FTSE 100 total return! 

 

 

However, the maximum drawdown (peak-to-trough) for each index/portfolio shows why diversification across asset classes can help to smooth your investment returns. 2008 was a painful period for most investors (circled in chart below). The largest drawdown was -43% for the FTSE 100, -47% for the FTSE 250. But for this 'Balanced' portfolio it was half that at -21%.

 

This is the ideology that sits behind our suite of Smart Portfolios: Risk and Returns

 

 

 is also completely right. I started the chart before the 2008 financial crisis to show that even investing through the worst market scenarios, a buy-and-hold approach over this period has provided solid returns in comparison to leaving your cash in the bank.