In the current economic climate, with interest rates still around record lows, investing in the markets could enable you to achieve an inflation-beating return and help you reach your long-term financial goals.
If you’ve got sufficient money in your cash savings account – enough to cover you for at least six months’ worth of living expenses – and you want to see your money grow over the long term, then you should consider investing some of it.
The right savings or investments for you will depend not only on your current finances and future goals but also on how prepared you are taking risks.
Before even considering investing your money, you need to be comfortable with the risks involved. The action or process of investing money for profit can take many forms, but most people typically choose from four main types of investment, known as ‘asset classes’.
There are also other higher-risk types of investments available too, including:
Depending on where you put your money, it could be paid in a number of different ways:
Understanding the risks you’ll encounter when investing and deciding how much risk you are willing to take is fundamental. You might have a long time frame, and plenty of cash to fall back on, but if you don’t think you would be comfortable if the markets became volatile, a high-risk approach probably isn’t for you.
There’s no such thing as a ‘no-risk’ investment. You’re always taking on some risk when you invest, but the amount varies between different types
Even money you place in secure deposits such as savings accounts risks losing value in real terms (buying power) over time. This is because the interest rate paid won’t always keep up with rising prices (inflation).
On the other hand, index-linked investments that follow the rate of inflation don’t always follow market interest rates. This means that if inflation falls, you could earn less in interest than you expected.
Stock market investments may beat inflation and interest rates over time, but you run the risk that prices may be low at the time you need to sell. This could result in a poor return or, if prices are lower than when you bought, losing money.
Spreading your risk (called ‘diversifying’) by putting your money into a number of different products and asset classes is one way to reduce risk, so if an investment doesn’t work out as you had planned you’ve still got exposure to others.