If you’ve got a lump sum of money you’re saving for the future, it can be difficult to decide what to do with it. You essentially have two options: hold it in cash or invest it. While cash offers protection, you could miss out on higher returns. Which option is right for you will depend on your attitude to risk and your overall financial situation.
Research from Aegon suggests that Brits are more likely to take a risk-averse approach; opting for savings accounts over investments.
- Two-fifths of people avoid investment risk at all cost; just 6% say their family and friends would describe them as a risk taker
- 56% describe their risk appetite as zero or low
- Two-thirds would be unlikely to invest any extra money into riskier investments, such as stocks or shares, within the next year
- Fear about making the wrong decision was the most common reason for not taking risks with savings
Both options have drawbacks
While the research indicates that Brits are well aware of the risks associated with investing, it’s important to know that holding cash can also be detrimental to your financial health if it’s not the right choice for you. Both options can affect your savings.
Cash: As long as your money is held with an authorised financial services firm, the Financial Services Compensation Scheme (FSCS) provides you with protection. Should the provider collapse, you’re entitled to compensation up to £85,000 per bank or building society. If you have more than this limit, you can spread your cash across multiple banks to ensure protection.
With cash, the drawback comes from inflation. Interest rates are low and failing to keep pace with inflation. As a result, the value of cash assets is reduced in value in real terms over time. While the amount in your bank account may not fall, your spending power does.
Investments: When you choose to invest, you have an opportunity to outpace inflation to grow your money. It can mean increasing your spending power through the generated returns.
Of course, investing does come with risks too. Volatility within the market can affect the value of your investments. There is a chance that, when selling your investments, you’ll receive less than you put in. The longer you invest for, the more likely you are to ride out dips in the market.
When is the right time to consider investing?
There’s no way to answer whether you should choose to invest over holding your money in cash. It’s a personal decision that should take into account many other areas of your financial situation, such as your capacity for loss and how long you’d be investing for.
However, if you have a reasonable emergency fund held in cash to fall back on, and are looking to make long-term returns, investing should be something you consider. It’s not the right option for everyone, but it’s worthwhile weighing up the pros and cons. It’s natural to want to be cautious with your hard-earned savings, even if investment could grow your wealth. The two most common reasons for avoiding investment risk are:
- Fear of making the wrong decision: Almost three in ten savers said they were put off investing because they worried about making the wrong decision. Given that a wrong choice could end up costing you money, it’s not surprising that people prefer a cautious approach when they feel they lack the right knowledge and experience.
This is an area that financial advice can help with. Talking to a financial planner about your aspirations and level of risk you’re comfortable with can be the starting point for building an investment portfolio that suits you. There are many different investment options, including those with a lower level of associated risk. Seeking advice can give you the confidence to start investing in a way that reflects your wider situation.
- Past volatility: The nature of investment markets means the value of investments rise and fall. At a glance, it can seem like a daunting prospect. In fact, among savers that said they are more risk-averse now when compared to ten years ago, 31% stated nervousness about the overall global economy put them off investing. A quarter had concerns there will be another financial crash and 19% said they had experienced financial losses in the past, influencing their decision.
While short-term volatility is expected in investment markets, when you look at the long term markets have historically recovered. This is why it’s important to invest with a long-term outlook; it gives you a greater opportunity to ride out the bumps in the market.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
