Why invest?
It’s sensible to keep some of your money where you can get instant access to it. Consider investing the rest to beat inflation, grow your savings or shelter your cash from the taxman. Property, ISAs, shares or bonds are just some of the ways you could invest your money...
Why invest?
You'll always need to hold some of your money as cash. But if you keep all of it in a savings account, inflation can eat away at it – especially when interest rates are low. So over time a given amount will buy less and less.
Investing is one way of trying to beat inflation. It gives your money the potential to grow or generate an income at a higher rate than cash over the long term (at least five years). Remember, investments can rise and fall in value.
Figures are illustrations only.
Inflation vs saving and investing
If inflation was 4% a year for 10 years, prices would increase by 48%. You'd need £148 to buy goods that had cost just £100 ten years earlier.
If you'd put £100 in a savings account and earned 2.5% a year for 10 years, you'd have just £128 at the end (before tax). Your savings haven't kept up with inflation.
Savings
If you'd invested £100 and it grew at 7% a year, you'd have £196 after 10 years.
Investments
You can invest in all sorts of things
There are four main types of investment, called asset classes. There's no "best" one – they have pros and cons. Click each one below to find out more...
Cash
Deposits held in bank and building society accounts.
Low risk, but inflation can erode its value when interest rates are low.
Find out more
Bonds
Loans to the government or companies. Normally pay a regular income until maturity. Usually viewed as safer than shares. Find out more
Property
Residential or commercial buildings. Often seen as higher risk, and values rise and fall. Can be hard to sell. Find out more
Shares
A stake in a company.
High risk. Prices rise and fall but historically over the long-term they have tended to perform better than the other asset classes.
Find out more
Cash in more detail
The lowest risk asset category is cash because its value normally does not go up and down, and your savings increase through the accumulation of interest. However, interest rates go up and down depending on the general interest rate of the economy.
Cash is not completely risk-free as its purchasing power can be eroded by inflation and the bank or building society could run into difficulty. The Financial Services Compensation Scheme was put in place to protect savers from such a risk by protecting up to £50,000 held directly in a bank or building society savings account.
While cash is an essential part of everybody's investment mix, you should consider holding some of your savings in other assets that have potential to grow so they can keep pace with inflation.
Please be aware that you can also invest in cash-based investment funds often referred to as money market funds which are not as secure as bank or building society accounts – more information can be found on this type of fund elsewhere on our site.
Bonds in more detail
There are two common types of bonds, Government bonds and Corporate bonds. Bonds are issued when a company or a government want to borrow money from investors. They are normally issued for a fixed period and they pay back a fixed rate of interest each year, until the investor receives their capital back. You can invest in bonds by buying directly but the more common way to invest in bonds is through a fund.
The more secure the government or company that issued the bond, the less risky the investment tends to be – because there is less chance of them not paying your income or giving you your capital back. The income (commonly referred to as the yield) paid on bonds will normally reflect not only the credit rating of the government or company issuing the bond, but also current and expected interest rates.
In addition, bonds that have a short time until they mature (say less than 1 year) tend to be safer than those with a long time until maturity (say longer than 15 years), which can be quite volatile. If you need to sell a bond before its maturity, you may get back less than you paid.
Property in more detail
Many people regard their own homes as an investment, although realising the value of this investment can be tricky unless you are prepared to downsize.
Buy-to-let properties are another alternative or there are commercial property funds, which invest in different types of business property, including shops, offices and industrial premises.
However, as the recent past has shown us, property values do fluctuate significantly.
You can invest in property directly, or through a fund (or both). But irrespective of how it is bought, it can sometimes take a long time to sell, which means that you may not have instant access to your investment.
On the plus side, property can be a sound long-term investment, providing regular income and the possibility of real growth in value. It does not tend to behave like other investments such as equities and bonds. Therefore, investing in property is a good way to diversify your portfolio.
Shares in more detail
Most people invest in shares to try and get a better return than safer investments such as bank deposits.
Returns from shares can be from dividends and/or changes in the share price. The value of shares can of course fluctuate depending on factors such as current and anticipated future performance of the company, investor sentiment, the political and economic environment, inflation etc.
You can spread the risk by investing, via a fund, in a variety of different shares within different sectors and countries.
Funds: easy way to start investing
When you invest in a fund your money is pooled with other people's – together you can buy many more types of asset than you could on your own. This reduces the risk of buying one asset and it doing badly. Investing via funds reduces the overall risk of investing in an asset class, because you're not investing in just one property or just one company. A professional manager decides what to buy, based on the aims of the fund. Funds can aim for growth, capital protection or income, invest in one asset class or several, and invest in the UK or abroad. You choose the type of fund.
Can invest in asset classes such as Cash & Money Market, Bonds, Shares and Property.
Risk vs return
When it comes to investing, you need to balance risk and return. In general, the less risky the investment, the more likely you are to get your money back but the less the potential for growth. The more risk you're prepared to take, the higher the potential return usually is.
You need to assess your own attitude to risk, and invest accordingly (taking financial advice when you need). Some people are comfortable only with low-risk investments. Others are prepared to mix less risky investments with others that have the potential for higher growth. Bear in mind that within each asset class, individual investments behave differently, and some will rise and fall more in value than others.
Investments may be volatile
The value of investments can rise and fall. Their performance is affected by a number of things, such as economic conditions, a company's profits and the exchange rate (if it's a foreign investment).
Over time the effect of these peaks and troughs tend to be smoothed to some extent, which is why investing is seen as a long-term activity.
Because of these fluctuations, investing regular amounts rather than lump sums can be a good idea, as you end up paying an 'average' price, which means you reduce the risk of seeing an immediate fall to all of your capital. What matters, though, is how much your investment is worth when you cash it in.
A volatile investment – the value fluctuates with extreme highs and lows.
A steadier, less volatile investment. The ups and downs are less extreme.
If you needed your money back here, the volatile investment would be worth less than the less volatile one.
If you don't need access to your money in the short-term, the more volatile investment could end up being worth more.
To sum up...
- Holding all your money in cash is not always the best option in the long term – inflation can mean your purchasing power may decrease.
- Investing is a way to try to beat inflation – to make your money grow at a faster rate than if you held it as savings in a bank or building society.
- There are four main types of investments, called asset classes: cash, bonds, property and shares.
- You don't have to invest in them directly – by investing in funds, your money can be spread across several different investments, reducing the risk of having everything in one place.
- Funds, like the underlying investments, have different degrees of volatility – the amount that their value goes up and down.
- You need to balance risk and return. In general, riskier investments have the potential to make greater returns, but you may have less access to your capital in the short-term.
With all investments, the value can go up and down and you may not get back what you originally put in. You may wish to speak to an adviser before you invest.
