M<\/span>any DIY investors have given up on bonds. They\u2019ve thrown their lot in with money market funds<\/a> instead. I think that\u2019s a mistake.<\/p>\n The evidence suggests that replacing bonds with money market holdings is liable to suppress portfolio returns and leave you under-diversified in the face of future stock market crashes.<\/p>\n Let\u2019s see why.<\/p>\n Our first comparison pits a money market ETF versus an intermediate gilts ETF in a cumulative nominal<\/em> return head-to-head:<\/p>\n Investing returns sidebar<\/strong> \u2013 All ETF returns quoted are nominal, GBP total returns (including interest and fees). All asset class index returns are annual, inflation-adjusted, GBP total returns (including interest but not fees). ETF returns data and charts come from JustETF<\/a>.\u00a0Gilt annual returns are from JST Macrohistory<\/a> and FTSE Russell<\/a>. Money market annual returns are from JST Macrohistory and the Heriot-Watt \/ Institute and Faculty of Actuaries \/ ESCoE British Government Securities Database<\/a>. UK inflation statistics are from A Millennium of Macroeconomic Data for the UK<\/a> and the ONS<\/a>. May 2025.<\/p>\n Strewth, intermediate gilts lost 28.4% in the past five years! And that\u2019s without trowelling on extra misery from inflation, which the data provider doesn\u2019t incorporate into its graphs.<\/p>\n The real terms loss is more like 38%.<\/p>\n So much for bonds\u2019 reputation as a \u2018safe\u2019 asset.<\/p>\n The money market also inflicted a 9.6% real-terms loss too \u2013 but that\u2019s only a quarter of the kicking meted out by bonds. One in the nuts rather than four-times in the nuts.<\/p>\n I find it easier to compare real annualised returns when assessing investments, so I\u2019ll translate the ETF results into that format as we go. (I\u2019ll use inflation-adjusted annual index returns to continue the match-up all the way back to 1870.)<\/p>\n Here\u2019s the real annualised returns for the past five years:<\/p>\n Money market wins!<\/p>\n We\u2019re supposed to care more about the long term, right? Our investing horizons ought to be counted in decades not a handful of years.<\/p>\n Let\u2019s zoom out to the past ten years, the maximum time frame offered by most data houses:<\/p>\n Do I hear: \u201cSo you\u2019re telling me that gilts lost money over the last ten years? I\u2019m out.\u201d<\/em><\/p>\n Meanwhile, money market funds \u2013 popularly billed as \u2018cash\u2019 \u2013 are up 15% in nominal terms.<\/p>\n (Incidentally, money market funds<\/a> are \u2018cash\u2019 in the same respect that bonds are \u2018safe\u2019. Read that article for more.)<\/p>\n Real annualised ten-year returns:<\/p>\n Money market wins!<\/p>\n If you can call a loss winning.<\/p>\n Let\u2019s keep going. If money market funds are the superior product then they should dominate beyond the last decade. Ten years is nothing much. We overweight its importance due to recency bias.<\/p>\n Well, this complicates the picture.<\/p>\n If you held both ETFs in equal measure for the past 15 years then your money did better in gilts \u2013 despite the enormous bond crash of 2022<\/a>.<\/p>\n Real annualised 15-year returns:<\/p>\n Gilts win!<\/p>\n On this view, money market funds were twice as bad as gilts over the last 15 years.<\/p>\n Mind you, gilts still turned in a decade and a half of negative returns. Nobody comes out of this looking good.<\/p>\n The easily-accessible ETF data runs out around the 18-year mark. Money market funds are only lagging further behind at this stage:<\/p>\n Gilts returned 64% more than money market funds over the entire period that both asset classes became accessible via ETFs.<\/p>\n Real annualised 18-year returns:<\/p>\n Gilts win again!<\/p>\n True, 18 years worth of negative returns for both asset classes is a poor show. There\u2019s no denying that.<\/p>\n Over the longer run though, they still both offer the expectation of a real-terms gain, which is why they have a place on our list of useful defensive diversifiers.<\/p>\n Money market returns were undone over the 18-year view by the period of near-zero interest rates triggered by the Global Financial Crisis (GFC).<\/p>\n Meanwhile gilts were scuppered by the abrupt return to interest rate \u2018normality\u2019 as central banks fought post-Covid inflation.<\/p>\n Lost decades happen. That\u2019s the nature of risk.<\/p>\n We\u2019ve documented such wilderness years for equities and gold:<\/p>\n Nothing is \u2018safe\u2019<\/strong>. Every asset class can destroy wealth<\/a>. That\u2019s why the likes of shares offer you potential returns high enough to beat cash in the bank.<\/p>\n Because we can\u2019t know which risks will materialise in the future, we diversify our portfolios by holdings assets that respond differently to varying conditions<\/a>.<\/p>\n Not diversifying tempts fate like a farming monoculture. It works until it doesn\u2019t and then failure can be catastrophic.<\/p>\n It\u2019s especially important to diversify your defensive, non-stock assets as your pot grows to a significant size. Preservation becomes as desirable as growth, psychologically, once you cross a certain threshold.<\/p>\n The growth side can still be adequately diversified by a single global tracker fund<\/a>.<\/p>\n However defensive asset allocation<\/a> is trickier, and neglected because it is complicated to execute, suffers from industry over-simplification, and is less well understood by the public at large.<\/p>\n To be fair, it\u2019s not an easy problem to solve. I guess that\u2019s why many people are throwing up their hands and dumping everything in money market funds.<\/p>\n But I digress. <\/p>\n Let\u2019s finish off our money market versus gilts drag race. We don\u2019t need to stop after 18 years. We can keep comparing bonds and money market returns all the way back to 1870.<\/p>\n If money markets really do beat govies then they\u2019ll be back in the lead before long, eh?<\/p>\nMoney market vs gilts: five-year returns<\/h2>\n
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Money market vs gilts: ten-year returns<\/h2>\n
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Money market vs gilts: 15-year returns<\/h2>\n
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Money market vs gilts: 18-year maximum ETF timeframe<\/h2>\n
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Thrive or dive<\/h3>\n
Keeping hold of what you have<\/h4>\n
Money market vs gilts: 125-year returns<\/h2>\n
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