Conventional wisdom says that cash is king and stocks are risky. This is true – in the short term. But over a longer time horizon, leaving your money in cash may not be the best way to guard against losing value.
Are stocks as risky as you think?
In fact, in the long run there is a material risk your cash may not achieve returns in real terms, which could well mean that you don’t achieve your saving goals.
The way we think about risk is ingrained. This is particularly acute when it comes to stock market investing, which we’re conditioned to think is high-stakes, due to the daily ups and downs of markets that we hear about in the news. However, the chances of positive returns after inflation have historically been higher the longer you hold them. While cash is generally safer in the short term, it’s unlikely to grow meaningfully over a longer period.
Performance assumes all fund charges have been taken and that all income generated by the investments, after the deduction of tax, is reinvested in the fund.
So why, despite the evidence against doing so, do we leave our money languishing in cash? The first reason is our reluctance to ‘lock’ money away for the long term. Instead, we prefer ‘easy access’ savings accounts that allow us to tap our money whenever we need it. Delayed gratification, on the other hand, is hard to get to grips with, even though it really can be very powerful when it comes to growing the money that you put away.
The second is that we struggle with taking risk in general. Although we’re told that investing for the long-term is the best approach, we balk at the concept of moving money we can afford into the market, for fear of seeing it fall in value over the coming weeks and months. Yes, investing in the short-term could jeopardise the security of your savings, but if you only ever take a short term view and fixate on what you may lose today, you may miss out on greater potential benefits of staying invested.
So your time horizon is essential when seeking to generate returns and staying committed can be the answer. While cash savings are generally secure in the short term, you may see the money you’ve worked hard to save eroded over time by inflation. Investing in stocks, on the other hand, can offer more opportunities to grow your money over time in real terms to meet your long-term goals.
The value of an investment and any income taken from it is not guaranteed and can go down as well as up; you may not get back the amount you originally invested.
Please remember that Ppast performance is not a guide to the future returns.
Tax rules for ISAs may change in the future and their tax advantages depend on your individual circumstances.
Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.