Why should I invest my money?

The main reason most people invest is so their money is worth more in the future when they plan to spend it, than it is now, at the point when they save it.

The most important thing to remember with investments is that they involve risk and your money may not increase in value; it could fall in value.

The following risk statement is not overstated, as anyone who invested just before the Covid outbreak would have found out:

The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.

So, if it involves risk, why invest at all?

If we don’t invest, we risk losing spending power. The graph below shows the growth of an investment, inflation and cash over a 15 year period:

Source: Balanced Investment: FTSE UK Private Investor Balanced Index, Inflation: Office of National Statistics, RPI, Cash Savings: Bank of England Base Rate +0.5%
NB: Past performance is not a reliable indicator of future results

The above graph does not account for charges, which would reduce the ultimate value of the investment. However, even with those taken into account, this individual would have been better off investing than holding onto their cash fifteen years ago. Critically, the cash investor lost purchasing power with interest not keeping pace with inflation over the period.

Someone investing for the first time in 2008 would have got off to a poor start but even they would have overtaken the cash position in spending power within three years and caught up with inflation within four.

There is no guarantee that investments will outstrip inflation in future, but history suggests that if invested for long enough, investments tend to. The important lesson here is that investment markets can be beneficial for longer term investments in excess of five to ten years but are unpredictable in the short term.

The industry uses the term ‘balanced’ to describe someone quite close to the middle of the risk spectrum. An investor taking more risk would have expected a greater return for the risk deployed and a lower risk investor would have expected a lower return on their investment than the balanced investor.

How do I invest?

Most people with a pension are already investing on some level. A pension is not itself an investment, but a tax efficient wrapper for holding assets.

Most pensions have a default investment strategy that investors are placed in, but many offer a selection of funds. It is useful to review your pension investment periodically, as the longer you are invested appropriately, the closer to your goals you are likely to be.

If you want to invest outside a pension then it is possible through a stockbroker, a financial adviser or some other financial institutions. If you have a strong idea of how you want to invest already, online accounts can be opened to allow you to select your own investments.

If you are unsure how you want to invest, you can get advice from an adviser or fully hand the decisions over to an investment manager. The advantages of getting professional help here include risk assessment, identification of tax efficiencies, market research for the best providers and ongoing support.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 1st June 2020.  You are recommended to seek competent professional advice before taking any action.  

If you would like any advice regarding investments, please get in touch with our team.