But the reality is that this isn’t the first time we’ve seen significant market volatility – and it won’t be the last. The FTSE® 100 Index has shown us that over the last 35 years markets have typically recovered from falls over time and, because of this, investing can still be a great way to help you reach those important milestones with your money in the long term.
So here’s a reminder of the main reasons why you should still consider investing your money, whether that’s through your pension plan or a stocks & shares Individual Savings Account (ISA).
1. To give your money the chance to grow
When you invest your money, you’re giving it a chance to grow in value. And although your money is typically more secure in a bank or building society because it’s not exposed to market volatility, generally the longer you leave your money invested, the better your chances are of seeing it grow.
It will almost certainly go down as well as up in value but taking a long-term view when investing can also mean you don’t need to worry too much about short-term market falls.
You can even get additional growth on any investment growth
It’s called compound growth – something Albert Einstein is said to have dubbed the eighth wonder of the world. It basically means the longer you keep your money invested, the more likely it is to grow. This is because each year you have the opportunity to achieve growth, not only on the money you’ve invested, but also on the growth you might have already experienced.
Let’s say you invest £100. Any growth you get will be added to that £100. And in the following years, any further growth you get is added to your original £100, plus any previous growth. If you leave your investments with the aim to grow, this could happen year on year – a ‘snowball’ effect.
It might not sound like much, but over time it can help build up to be a good chunk of the final value of your investments – as you can see below. This also explains why you may not actually have to pay in as much yourself. Of course, there are no guarantees – investments can fall as well as rise in value, and you could get back less than was invested.
This graph is only to illustrate the potential impact of compound growth if you regularly invest money over the long term, for example into a pension plan. It’s not based on actual figures, and doesn’t take account of short-term ups and downs in value or the impact of charges and inflation which could reduce your buying power.
2. Generate an income through investing
Another reason to invest is to generate a source of income. When you’re saving for retirement, the chances are you’re investing to try and grow your money as you’ll want to try and build up as large a pot as possible. But nowadays many people are keeping their pension savings invested once they’ve retired, and taking money out as income to live on – you might see this called taking a flexible income or drawdown.
If you go down this route, your pension savings will need to cover not only your immediate spending but also the money you’ll need to last you through the rest of your life. That’s why it’s important to make sure where your pension savings are invested supports these goals.
Create a ‘natural’ income
Many types of investments are ‘income-generating’. For example, companies will often give out a proportion of earnings (dividends) each year to shareholders, bonds make regular interest payments (coupons), and property receives rental income.
If you have a Standard Life workplace or personal pension plan, it’s likely that this income will be automatically reinvested in the funds you’re invested through. If you have a product that lets you take income, and you decide to go down this route, it’s important to bear in mind that your investments might not rise in value as much as if you reinvest it. This is because reinvested income not only adds to the value of your money but also could benefit from the compound growth we mentioned earlier.
You can find out more about different types of investments, including how they could generate income, in our guides on where to invest.
3. Help avoid the impact of inflation
Investing also helps limit the effects of inflation on your money. If you need to access your money in the short term (five years or less) then leaving your money in a savings account can make sense. But leave it any longer and it’s likely to lose value when you take inflation into account.
The effect of inflation could effectively chip away at your cash savings every year. Since 2008, interest rates have been very low and, importantly, less than inflation. So your cash savings could be steadily worth less and less in today’s terms.
This is particularly significant in recent months with interest rates in the UK now at an all-time low, and negative interest rates even being discussed as a way to rescue the economy from the effects of the coronavirus pandemic. Although this could be positive for those looking to borrow money and take out loans, it could have a negative impact on savers, with savings rate potentially falling to zero or below – which could mean that it would actually cost you money to save.
So investing could be a way of giving your money the chance not only of maintaining its value but also the potential to grow in value.
If you’re still unsure if investing is right for you, it’s a good idea to consider getting financial advice, as an adviser can provide you with a tailored plan that meets your individual needs. You can find one at unbiased.
This article should not be regarded as financial advice. The information here is based on our understanding in June 2020. Tax rules can also change and their impact on you will depend on your own circumstances.
The value of investments can go down as well as up and may be worth less than you paid in. Past performance is not a guide to future returns. If you’re looking for help with any of these things it would be worth speaking to a financial adviser. There is likely to be a charge for this.
*FTSE International Limited (‘FTSE’) © FTSE 2020. ‘FTSE®‘ is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence.