To save or to invest?
Most of us are familiar with saving. We start with our piggy bank, move on to our first bank account and then maybe a cash ISA. Savings are familiar and feel safe. But are they the best place to keep all your money over the longer term (five years or more)?
It’s true that, if you keep your money in savings, it won’t go up and down like investment values do and you don’t risk getting back less than you put in. But if you keep money in savings for a long period of time, rising prices (inflation) mean your money may not have the same buying power when you come to spend it as it did when you put it away.
|Item||Dec ‘77||Dec '87||Dec '97||Dec '07||Dec '17|
|Loaf of white bread||24p||46p||51p||99p||£1.05|
|Pint of milk||12p||26p||35p||39p||45p|
|Kilo of cheddar cheese||£1.50||£2.82||£5.25||£6.34||£7.33|
|Kilo of pork sausages||£1.02||£1.85||£3.04||£3.47||£5.16|
|100g instant coffee||£1.23||£1.33||£2.03||£1.97||£2.98|
|Pint of bitter||-||85p||£1.66||£2.32||£3.08|
Can your money keep up?
Looking back at history shows that over the longer-term investments have tended to do better against inflation compared to money kept in savings (cash).
From the chart below you can see that the performance of UK shares, UK Government bonds and UK commercial property has on the whole been greater than that of UK cash over the last 15 years.
Over the same period, inflation meant that what you could have bought for £10,000 in November 2002 would have cost you £15,477 in November 2017.
Remember things might look different for other investment markets around the world and over different time periods. It’s also important to be clear that what has happened before is no guarantee of what will happen in the future. Nothing is that predictable.
- UK cash: the return from cash assuming it receives the same interest rate as the Bank of England’s Base Rate with interest reinvested.
- UK Government bonds: the growth in value of fixed rate bonds issued by the UK Government, with income reinvested, as reported by the FTSE Actuaries UK Gilt Index for bonds with a duration of 5 to 15 years.
- UK shares: the growth in value of UK shares, with income reinvested, as reported by the FTSE all-share index.
- UK commercial property: the growth in value of shares in UK commercial property, with income reinvested, as reported by the MSCI UK All property index
- Inflation: increase in the UK Retail Prices Index (all items)
To save or to invest?
The main risks with investing are that investment values go down as well as up and you could get back less than you put in. But as we’ve seen, by taking these risks you also have the potential to do better against rising prices than you would with savings. This is the opportunity investing offers you.
The short-term ups and downs of investments mean it might not be such a good idea to invest if you’re looking to access your money within five years.
It’s not that you won’t be able to sell your investments in a shorter timeframe. Many types of investments can be sold quickly with very little effort on your part and you’ll usually get the proceeds within five days. It’s that you’re less likely to make a profit and be more at risk of making a loss if you do.
In the end whether to save or invest is a question personal to you. And the answer depends on your circumstances. Investing is not right for everyone.
Finding a balance
For many it’s about finding a balance between savings (where the risk is your savings might not keep up with rising prices) and investments (where the risk is you could get back less than you put in).
Having some money in savings is widely accepted to be a good thing. But if you’ve already got a good savings pot, check the interest you are earning on it. How does that compare to inflation? (Inflation rates are published every month so are easy to find online).
Ask yourself, am I missing an opportunity? Could I be making my money work harder by moving some of it into investments?