When you’re putting money away for the future, it’s natural to want to protect it. Whether it’s earmarked for a particular reason or it’s simply a good money habit, you don’t want to lose it. A glance at the news, filled with economic strife, political uncertainty and other negative stories, and it’s easy to see why you may be tempted to hoard your wealth in cash assets.
However, it’s a reaction that could be costing you money.
Bias naturally affects our financial decisions. From personal experiences to news stories, what we see and hear shapes the decisions that we make. This filters into the money choices we make too. Say you invested ten years ago and you saw a significant return, you’ll naturally be more inclined to take a risk with your next investment. On the other hand, if your investments fell in value, you may become more cautious. The same principle applies to factors that don’t have a direct impact on us, simply reading about falls in the stock market or turbulent economic times can have an influence.
What’s more, the theory of loss aversion suggests we have a tendency to focus on the potential risks over the potential gains. The theory builds on our preference to avoid losses over acquiring equivalent gains: it’s better to not lose £100 than to find £100, for example.
With this in mind, and the often overwhelmingly gloomy outlook in the press, you may be choosing to hold assets in cash over investments. However, research suggests it could mean losing out, even during ‘bad’ times.
According to Schroders, after adjusting for the effects of inflation:
- £1,000 held in cash at the start of 1989 would now be worth £467 due to the impact of inflation eroding spending power, representing annual growth of -2.7%
- If £1,000 had been placed in a UK savings account at the same time, it would now be worth £1,011, after experiencing annual growth of 0.03%
- On the other hand, if the money had instead been invested in the FTSE All-Share Index, with all income reinvested, it would have experienced annual growth of 11.2%, taking it to £5,683
Perceived reasons not to invest
The above figures offer a compelling reason to invest. However, the Schroders research goes further and looks at the ‘reasons not to invest’.
When you’re considering investing your savings there are almost always reasons not to do so. At the moment, it may be the uncertainty Brexit presents, the trade war between the US and China, or the recent volatility experienced in the markets, for example.
But, when you look beyond the headlines and at the long-term impact, investing can still prove profitable.
Looking back over the last three decades, the research identifies a reason not to invest each year, ranging from the Balkan War to the dotcom bubble. Among the most recent reasons are the China stock market crash in 2015, the UK voting to leave the EU in 2016, and the rise of the populist vote in 2017.
While it’s true the value of an investment in the FTSE 100 All-Share Index has fallen at times in the last 30 years, it’s continued to outperform cash and money held in a savings account.
Take the 2008 global financial crisis, for example, the UK stock change was -29.9% that year. If £1,000 had been invested in 1989, it would have decreased in value by £1,305 to £2,597 in 2008 alone. That looks like a reason not to invest. But when you compare it to the value of cash or money in a savings account, £1,304 and £573 respectively, investing still delivers better returns.
The table below demonstrates how that initial £1,000 would have changed over the years based on UK stocks, average savings rate, and the pace of inflation.
| Year | A reason not to invest? | Value of £1,000 invested in UK stocks (EoY) | Value of £1,000 left in a savings account (EoY) | Value of £1,000 stuffed under your mattress |
| 1989 | Junk bond crisis | £1,291 | £1,068 | £948 |
| 1990 | Recession | £1,074 | £1,066 | £882 |
| 1991 | India economic crisis | £1,091 | £1,033 | £815 |
| 1992 | UK pulls out of the ERM | £1,268 | £1,042 | £780 |
| 1993 | Swedish banking crisis | £1,596 | £1,036 | £761 |
| 1994 | Balkan War | £1,471 | £1,039 | £746 |
| 1995 | Tequila Crisis | £1783 | £1,035 | £726 |
| 1996 | Fed chairman questions stock market valuations | £2,037 | £1,028 | £708 |
| 1997 | Asian crisis | £2,480 | £1,044 | £695 |
| 1998 | Russian financial crisis | £2,782 | £1,057 | £684 |
| 1999 | Argentine economic crisis | £3,419 | £1,044 | £675 |
| 2000 | Dotcom bubble | £3,190 | £1,058 | £670 |
| 2001 | Twin tower terrorist attack | £2,726 | £1,047 | £662 |
| 2002 | Stock market crash | £2,074 | £1,038 | £653 |
| 2003 | War in Iraq | £2,478 | £1,038 | £644 |
| 2004 | Terrorist attack in Madrid | £2,763 | £1,048 | £636 |
| 2005 | London bombings/Hurricane Katrina | £3,315 | £1,045 | £623 |
| 2006 | Housing bubble | £3,793 | £1,041 | £608 |
| 2007 | Sub-prime mortgage crisis | £3,907 | £1,051 | £594 |
| 2008 | Global financial crisis | £2,597 | £1,034 | £573 |
| 2009 | Global recession | £3,323 | £1,020 | £560 |
| 2010 | European sovereign debt crisis | £3,695 | £1,016 | £542 |
| 2011 | Greek debt crisis – bailout | £3,403 | £1,005 | £518 |
| 2012 | US heads towards the fiscal cliff | £3,725 | £1,023 | £503 |
| 2013 | Russia invades Ukraine | £4,404 | £1,016 | £490 |
| 2014 | Brazilian economic crisis | £4,392 | £1,025 | £483 |
| 2015 | China stock market crisis | £4,433 | £1,040 | £483 |
| 2016 | UK votes to leave the European Union | £5,147 | £1,033 | £479 |
| 2017 | Rise of the populist vote | £5,683 | £1,011 | £467 |
Source: Schroders
Is there a wrong time to invest?
Those new to investing often believe timing is important. However, it’s near impossible to predict and time the market. As a result, a common adage for investing is: time in the market is more important than timing the market.
That being said, there are times when investing may not be the most appropriate option for you. If you’re saving for short-term goals, for example, holding your savings in cash assets may prove a better option. You should plan to invest for a minimum of five years.
Another important area to note is your capacity for loss; investments can fall in value. If your lifestyle would be impacted should this happen, you should reconsider investing. Money held in saving accounts may not benefit from investment returns, but they may be protected under the Financial Services Compensations Scheme (FSCS). The FSCS provides protection for up to £85,000 per person per authorised bank or building society.
Please note: The value of investments 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.
