Cash can be comforting; put £10,000 in a savings account and when you need it, you’ll get £10,000 back, possibly with a little interest. Against this apparent stability, it’s perhaps understandable that people don’t want to take a chance on an unpredictable
stock market, where the value of your money can depend on everything from interest rates to a geopolitical crisis. However, first impressions can be deceptive.
Beware ‘reckless caution’
While cash may be superficially ‘safe’, there can be a sting in the tail. If you’re putting money aside for the long-term the important question is what it could be worth when you need it. With cash, you have the comfort of knowing you’ll get your £10,000
back but what will it be worth in real terms?
At the moment, the
top-paying cash ISA has an interest rate of 0.77%. The most recent inflation figures show UK price rises running at 5.5% (CPI).
The Bank of England predicts that inflation could peak at 6% in the spring. It may rise even higher if the Ukrainian crisis pushes energy costs still higher.
The effects of inflation on cash holdings can be significant
For example: cash savings worth £10,000 would be worth just over £6,000 in real terms after 25 years, with inflation at 2%. This is the Bank of England target and far lower than current inflation predictions. At 3%, that savings pot
falls to £4,776, at 4% it’s worth just £3,751. Interest rates are rising and may mitigate this to some extent, but investors still need to tread carefully.
Cash ISAs remain popular: 75% of ISA products are cash. However, only 49% of the
£620 billion held in ISAs is cash. In other words, the 25% of ISAs invested in stocks and shares account for 51% of the total value.
Cash has its place in a portfolio. Most financial advisers suggest holding three to six months’ worth of spending in an accessible account to guard against life’s unexpected events, such as redundancy, emergency repairs, or short-term sickness but it’s not
a route to significant growth.
Investing for long-term growth
Growing your money over the long term for retirement or any other goal means investing, which in turn means taking some degree of risk.
Any stock market investment involves risk; markets go down as well as up and there is always the possibility of losing money. However, stock market investment does not have to be all or nothing and there are ways to mitigate the risks.
1. Invest regularly - putting money into the stock market little by little rather than all in one go helps to balance out market risk. You will buy in at a variety of prices so there is less risk of buying when markets are at their highest (and, potentially,
just before a crash). It is also a good discipline and removes the question of when is a good or a bad time to invest. Some occasions may be better than others, but it will even out over time.
2. Choose carefully - don’t be seduced by the get-rich-quick allure of an obscure technology name. Collective investments, which give you a diversified portfolio of investments at relatively low cost can be a good starting point.
3. Spread your investments – having a diverse range of investments, with different countries, sectors and industries means your pot is less likely to all go up or down at the same time.
The stock market is a big place
You can invest across multiple sectors and multiple countries, and each will have its own flavour. The US market has a lot of high growth technology companies, while the UK is characterised by its large energy and financial companies. Europe has speciality
industrials and luxury goods companies. You can choose a type of investment that fits your comfort levels and financial ambitions.
4. Keep a long-term view - financial advisers generally recommend looking at a minimum of five years for investments and ideally more. The stock market can be volatile in the short-term and influenced by the latest news. However, while past performance
is not a guide to the future, investing has historically
tended to deliver stronger growth than cash and provide better protection against inflation.
5. Upgrade your investing experience – it’s worth spending some time thinking about how you’re going to invest: do you want to buy and sell investments or choose a ready-made portfolio? Are you confident to run things yourself or do you want to be
able to access help when you need it? Do you know what you’re paying and what you get for that? Where you hold your investment is just as important as the funds or shares your invest in.