Putting your money into a best-buy savings account can frequently give you a better return than buying shares, according to a major new piece of research looking at the performance of savings and investments since 1995.

The investigation was carried out by financial journalist Paul Lewis (no relation to MoneySavingExpert.com founder Martin Lewis).

It found that over most investment periods during the past 21 years, putting money into best-buy cash savings accounts would have earned you more than a FTSE 100 shares tracker (which follows the index of shares in the biggest 100 companies listed on the London Stock Exchange).

Investing in shares has often been seen as the Holy Grail of making your money grow, but that view now faces a serious challenge in light of the research, which also highlights the risk of actually losing money through making investments.

See our How to Start Saving guide for general savings tips, and Top Savings Accounts for need-to-knows and top picks.

What exactly did the research show?

It compared returns from a simple HSBC tracker fund (which follows or 'tracks' the FTSE 100 index of shares) with cash moved each year into a best-buy one-year deposit account with a bank or building society – sometimes called a 'one-year bond'. The research assumed dividends were reinvested, and that the cash was reinvested each year along with interest earned. It found:

  • Savings accounts beat the total returns on the tracker in 57% of the 192 five-year investment periods beginning each month from 1 January 1995 to the present. The tracker won in just 43% of periods.
  • Looking at longer time periods, the results were even more marked. For example, over the 84 14-year periods from 1995, cash beat shares a whopping 96% of the time.
  • Looking at a range of investment periods since 1995, from one to 11 years, the analysis found investments in funds that track the FTSE 100 would have actually lost money up to a third of the time. By comparison, there's no risk if you put cash into a savings account – you always end up with more than you started with.
  • However savings accounts didn't win in every scenario. The analysis found that over the whole 21-year period from January 1995 to January 2016, best-buy savings accounts would have produced an average 'annual compound return' (rate of return on your investment) of 5%, while the HSBC tracker fund would have yielded 6%.

    But even though over the whole period shares won, this finding is still notable. Normally investors are told a typical 'risk premium' (ie, the extra you're likely to earn for 'risking' an investment in a tracker rather than putting your cash in the bank) is between 3% and 8% – however, this research suggests it's closer to 1%.
Best-buy savings accounts often beat investing in the stock market, study finds
Money in a savings account will never be lost, but that's not always the case when investing in shares

How was the research conducted?

Paul Lewis, who presents Radio 4's Money Box programme, gained access to best-buy cash data dating back to 1995 from the financial information publisher Moneyfacts.

He says: "This analysis of the new data shows that people who prefer the safety of cash can make returns that beat those on tracker funds in a majority of time periods.

"It also confirms that the risk of making losses on a shares investment is very real. Over any investment period from one to five years from 1995 to 2015, there was about a one in four chance or greater that the value of the investment would fall. Even over nine or ten years, the chance of losing money was around one in ten. Few advisers know those odds – still less inform their clients of them.

"I have long suspected that the merits of cash were underplayed by traditional research which compares poor cash rates with often exaggerated gains on investments in shares."

So should I not bother investing in shares?

Not necessarily. While this research throws new light on the debate, how you save or invest is a personal decision which largely depends on your attitude to risk – and if you're less risk-averse, shares may be more up your street.

Lewis's research identified times when shares produced a higher return than cash – for example between 1 November 2008 and 1 September 2009 – and over the whole 21-year-period shares also came out marginally on top.

However, for investment periods of five years or more, there were 38 starting dates when cash would have always produced a better return, but only 24 starting dates when that was true of shares, which gives some idea of the odds.

Lewis adds: "Cash is not right for everyone in all circumstances. But for a cautious person investing for periods of up to 20 years this research indicates that well managed active cash beats a FTSE 100 tracker more often than not. And unlike a shares investment it can never lose anyone money."