Risk and reward

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4. Stock market performance compared to savings accounts

Another way of judging the stock market is to compare the gains made from a building society higher-rate interest account and the growth in income from an 'average company' (actually an investment trust in this example).

If you look at the table below you can see that the income from the building society wandered up and down, depending on current interest rates. The income from the 'average share' started from a lower figure but the dividend increased year after year and quickly exceeded that from the building society.

At the end of this period, the total income looks pretty similar. But two things make the investment trust look more attractive.

• Whereas the capital value of the £100 put in the building society is still £100, the capital value of the £100 invested in the trust rose to £297.00 (because the share price rose).
• The investment trust is consistently improving its dividend every year.

Using the same figures, and assuming that all income was reinvested, the total return after 10 years from the building society was £169.90 and from the investment trust it was £365.

The building society investment was safer than the stock investment in the strict sense it wasn't exposed to the possibility of a stock market crash, but in general a well-diversified portfolio of shares will produce a better total return over the long term than a bank or building society.

1. The right place for your spare money? 2. The golden rule 3. Stock market performance and inflation 4. Stock market performance compared to savings accounts 5. Specific risk 6. Market risk 7. Pound cost averaging - a way round risk 8. Overseas investments - currency risks 9. Conclusion

• Against the Gods