Over the past decade, cash in the bank has delivered a negative return in real terms (taking into account the effect of inflation).
Record low interest rates, combined with persistent inflation, have eroded the value of cash in a savings account, with cash sharply underperforming assets like UK shares.
It’s important to understand the difference between real and nominal returns when thinking about inflation and investments. Nominal investment returns can be flattered by inflation, because if prices generally rise over time, the price of your investments should rise too.
The mistake people make when thinking about cash savings is to ignore the impact of inflation. Even a relatively modest inflation rate of 2% (what the Bank of England targets) means that your money loses a third of its purchasing power over twenty years.
People tend to favour the apparent safety of cash over the perceived risks of investing. But while the immediate risk of investing may seem off-putting to some, this has to be set against the longer term risk of cash savings being eroded by inflation. This is the opposite to investing, where the longer you invest, the lower your risk of a negative return is, and the better your chances of outpacing inflation.
Choosing whether to invest, or put your money in cash, needn’t be a binary choice between low or high risk. There are a range of lower risk investments, like government bonds, whose rise and fall is generally more limited. That’s why we believe that when it comes to investing it’s important to seek advice, in person with a financial adviser. It will help you define your aims, formulate a personalised plan and will prove to be a conversation well worth having.
Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future returns. You may not recover what you invest.
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