A very unsatisfying feast

Statistics can be slippery things. The best bits of data are chopped into meaty chunks; a rich sauce of appetising comparisons is poured over them; and the whole thing is finished off with no-nonsense conclusions and presented with a flourish.

At this point it's all too easy to swallow the whole lot and feel well fed; but if you do start to chew over the morsels you have been offered, you may start to realise that your information is less digestible than it first appeared. In fact, you may have to spit the worst parts out altogether.

The latest quarterly performance figures from the Association of Unit Trusts and Investment Funds (Autif) serve to illustrate how such generalisations work. They show how the returns on stock market investments on average have outperformed earnings in a bank or building society deposit account over the long term.

Well, that's a surprise! You'd have had to be closeted in a world refreshingly free of financial transactions and news coverage to be unaware that the financial climate has swung around over the decade - that interest rates have been falling steadily while the stock market has been bubbling merrily away with only the odd glitch.

The scale of the gap in returns certainly underscores that point. An average building society deposit account of pounds 1,000 earned pounds 94 in interest in the year to July 1990; nine years of diminishing interest rates later, that figure has plummeted to pounds 30. The average UK equity income fund of pounds 1,000 in 1989 generated pounds 44 in income, which had risen pounds 62 10 years later, while the initial capital also grew by 97 per cent over the period.

Over those 10 years pounds 1,000 in the deposit account grew to pounds 1,579; with net income reinvested, the same sum in the average equity income fund practically tripled in value, to pounds 2,914. Drip-feeding regular savings of pounds 50 over the same period, the building society account built up to pounds 7,123 - towered over by the average UK All Companies fund's impressive showing of pounds 13,729.

But what useful generalisations can we draw from such figures? That if you want to earn greater returns you are likely to do better with more of your money in equities? That those who persist in holding all their earnings as cash on deposit are falling behind those who take a more adventurous approach and have dealings with the stock market?

The fact remains that equities and deposits offer different advantages and serve different purposes. Money in an instant-access deposit account is 100 per cent risk free and is easily accessed in case of emergencies or one-off expenses. It is a short or medium-term cushion-cum-enabler. If you have money that you can afford to do without for the foreseeable future, then it makes a great deal of sense to find a more lucrative investment than a dull deposit account. And indeed, that's the way to fund larger plans for the long term. The two are complementary investments and should be viewed as such.

There's another problem with the Autif figures, however, and that is that the use of average fund figures masks a huge spectrum of returns ranging from stellar performers to long-standing dogs.

So your pounds 1,000 ploughed into the star fund in the equity income sector, Jupiter Income, would have grown by more than five times, to pounds 5,289, over 10 years to the end of June (figures supplied by MoneyFacts).

If, on the other hand, you had invested in Premier Dividend's equity income fund, you would now have just less than pounds 2,000, about pounds 420 more than the average deposit account's 10-year showing, for considerably more risk and volatility.

In that respect, it is equally unhelpful to discuss average instant-access accounts. Of course the range between highest and lowest is much narrower, but the point holds that top-paying postal accounts, such as Bristol & West's Easy Access Plus, are paying roughly twice as much as the average.

And that leads to another interesting observation for short-term investments. The best one-year fixed rate bond deals a year ago (for example from Sun Bank) were paying 7.6 per cent gross, turning your pounds 1,000 investment into pounds 1,076 by the end of July 1999. Variable rates have fallen by a third over the same period, but pounds 1,000 in Nationwide's consistently competitive InvestDirect account would have grown to pounds 1,060.

By comparison, if you had made the mistake of putting it into Baillie Gifford's Income A stock market fund, it would have shrunk to pounds 917. That is a risk inherent in stock market investment, and over the longer term it may well correct itself; but at least a savings account doesn't nibble away at your original capital (though if interest rates don't keep pace with inflation then your money will be losing value in terms of buying power).

The simple lessons to be drawn from these observations are that funds and deposit accounts should work together to cover any eventuality, long or short term. But funds need to be chosen carefully, on the basis of consistent performance rather than freak results, and require regular monitoring.

Savers who don't look beyond the ancient deposit account are doing themselves no favours, certainly, but neither are the passive stock market investors. And statistics that gloss over differences in function and focus on the discrepancies in performance aren't much help either.