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Should you save cash or invest?

Find out why some people hold cash and other invest, and take a look at the difference in those two ways of accumulating wealth.

The value of investments can fall as well as rise; you may not get back what you invest. If you’re not sure about investing, seek independent advice.

Cash saving Vs Investing

The choice between holding cash in a bank account and investing could have a big impact on your future wealth. Moreover, these two ways of holding and accumulating wealth are very different:

Cash saving

When you hold cash in a bank account, the money is generally available to you in the short-term, and you expect to get back what you put in with interest added on top.

Investing

When you invest, you hope for greater returns but you have to accept that you might get less, or you might lose money and you could get back less than you invest. You also need to hold investments for the longer-term to give them the best chance of getting that greater return that you hope for.

Why do people save?

Anything that covers the running of your acount, but doesn't directly relate to transactions, is covered within a single monthly payment.

They are used to saving from a young age.

They are not sure how to invest.

They like to have easy access to their money, especially if they’re saving for a short-term goal.

They are uncomfortable that the value of investments can fall as well as rise and that there’s a chance they could lose money.

Why do people invest?

Anything that covers the running of your acount, but doesn't directly relate to transactions, is covered within a single monthly payment.

They are looking to achieve potentially higher returns on their money than they might get from holding cash.

They are prepared to accept the risk that the value of investments can fall as well as rise and that there’s a chance they could lose money.

They find the process of investing online as easy as putting cash into a bank account.

They are comfortable with the idea of setting their money aside for the long term - for at least five years.

There has been a large difference in returns in the past

Over the 7 year period, from January 2010 to December 2016, holding cash would have produced very different returns compared with investing in shares or bonds.

You do need to bear in mind that the past performance of investments is not a reliable indicator of their future performance. But here is what would have happened if you had started with £10,000 in January 2010:

Total returns over the 7 year period

If you started with £10,000 in January 2010, here’s how much it would have been worth by December 2016:

Cash

Returns from cash held relatively stable over the period and didn’t produce any negative results.


Returned 4.6%

If it was held as cash
£10,462

Bonds

Returns from bonds tended to rise and fall over the period, producing a negative result after 4 years.

Returned 4.6%

If it was invested in bonds
£12,794

Shares

Returns from shares tended to rise and fall sharply over the period, often year-by-year, with initial gains almost lost after the first 2 years.

Returned 94.1%

If it was invested in shares
£19,414

Saving over investing

When investments were held for short-term periods, less than 5 years, returns were volatile while returns from holding cash were steady.

Vs

Investing over saving

Investing in either bonds or shares over the fill 7-year period earned better returns than holding cash.

While this is what happened in the 7 year period between January 2010 and December 2016, other time periods may have produced different results, and the returns from holding cash could have been higher than the returns from investing.

For example, in 2008, around the time of the global financial crisis, stock markets produced mostly significant losses, some of them falling spectacularly. The investments of those who invested before the market collapse suffered considerable losses in value. Some investments may have recovered after that but for others the loss will be permanent.

Of course, no one knows how investments and deposits will perform in the future. And past performance is not a reliable indicator of future returns. The value of investments can fall as well as rise and you may get back less than you invest.

Annual returns over the last 5 years

Here are the annual returns per year for cash, bonds and shares over the last five years:

Jan 2012 – Dec 2012

Jan 2013 – Dec 2013

Jan 2014 – Dec 2014

Jan 2015 – Dec 2015

Jan 2016 – Dec 2016

Cash

0.83%

0.51%

0.54%

0.83%

0.50%

Bonds

-4.91%

-9.02%

4.00%

1.71%

20.98%

Shares

7.46%

21.87%

10.53%

1.85%

26.88%

Should you save or invest?

Anything that covers the running of your account, but doesn’t directly relate to transactions, is covered within a single monthly payment.

Short term goals less than 5 years

If you’re setting aside money for a short-term goal and you think you’ll need access to your money within the next five years, saving in a bank account would allow you to do this with little risk of losing money. There is, however, the chance that the interest you earn on your savings may not keep pace with inflation, or the rising cost of living.

Long term goals more than 5 years

If you’re setting aside money for a short-term goal and you think you’ll need access to your money within the next five years, saving in a bank account would allow you to do this with little risk of losing money. There is, however, the chance that the interest you earn on your savings may not keep pace with inflation, or the rising cost of living.

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The value of investments can fall as well as rise. You may get back less than you invest.

Investment Account

A fully flexible way to invest

A flexible, straightforward account with no limits on the amount you can invest.

Before you start

Tempting as it may be to plunge straight into investing, you may need to address other aspects of your personal finances first. In this section, you'll learn more about some of the things you should take into consideration before putting your money to work.

Principles of investing

If you’re new to investing, knowing where to start can be a daunting task. Here, we guide you through your investment journey, from what to consider before you start, the different types of investment account, which might suit you, and the various asset classes. You’ll also learn why it’s important to focus on the long-term as an investor, and create a diversified portfolio, which includes a range of different investments.