Why investing your money is more profitable than leaving it in a bank account
You’ve worked hard to accrue your wealth, so naturally you’ll want to see your finances flourish and develop. That raises the question: how best should you grow your finances?
Many people are drawn to banks to save their money, opting for the chance to get some interest and their money back. But in a time of rising inflation, you may be watching your money devalue over time. The wealth of many people in the UK is under threat, as inflation has risen past interest rates to slowly reduce your money’s buying power.
With inflation vastly outstripping savings account returns by 2%, it may be time to seek out other more valuable options to invest. An article in the Financial Times reported that at the current rate, a £100,000 lump sum will fall to £81,790 in real terms in just ten years.
Equities vs cash deposits
However, every year we’re reminded that equities are far more likely to produce higher returns than cash deposits. The most recent Equity Gilt Study released by Barclays found that since 1899, British stocks have returned 4.9% a year in real terms, compared to 1.3% for gilts and 0.7% for cash. Over the last decade, the respective figures are 5.8% for stocks, 2.7% for gilts and a miserable -2.5% for cash.
An investment kept for five years at any stage has a 76% chance of outperforming cash, which is no small margin. However, if you extend the holding period to ten years, the figure climbs up to a dizzying 91%. The Barclays study also found that reinvesting income dividends is crucial to long-term returns. If you had invested £100 in UK stocks at the end of 1945 without reinvesting the dividends, the amount would now be worth £244 after inflation.
Ian Cowie, Personal Account columnist for the Sunday Times, says that shareholders “benefit from improvements in efficiency and inventions that occur over time.” Meaning that, as companies innovate and grow, the situation becomes mutually beneficial.
With cash suffering from a steady decline as time goes on, it may be better to look towards other avenues of financial development as a way to diversify your savings and help them grow.
The value of investments or income from them may go down as well as up. As stocks and shares are valued from second to second, their bid and offer value fluctuates, sometimes widely. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.