Why it’s important to invest in the stock market v cash

INVESTING in the stock market is often perceived as being rather complicated and risky. Stock-market investing is of course far from risk-free and as a result of wanting to preserve their cash, many savers stash their money in bank and building society deposit accounts where they can see it. But there is actually a huge risk to the real value of that money sitting in these accounts, owing to the effects of inflation.

With interest rates so low, and the Bank of England’s decision to lower interest rates further to 0.25%, returns on savings accounts won’t keep up with inflation. This means that the real value of money kept in cash will continue to fall, especially as inflation is now on the rise.

Historically, stock market gains have far outweighed cash over the medium and longer term. So having some of your money in equities — that is, investing in companies that work hard to grow their earnings and provide investors with decent returns — will help outperform inflation.

If anyo ne is unsure about the benefits of investing in the stock market over stashing cash under the mattress, calculations by Fidelity show that if you had invested £15,000 into the FTSE All Share index 20 years ago you would now have £55,351. If, however, you had invested £15,000 into the average UK savings account over the same period, you would have a paltry £20,064. That’s a difference of £35,287 —far too big for anyone to ignore.

Worryingly, a new study reveals that 81% of UK savers say that they will keep their money in cash accounts instead of investing it. That’s an awful lot of people losing money.  The study by digital wealth management company MoneyFarm, says that many investors leave their money in cash because they feel that investing is too risky compared to cash (37% of savers), that it’s too difficult to decide what to invest in (18% of savers) and investing in other asset classes is too cumbersome (11% of savers).

There are ways to minimise risk. Instead of choosing individual companies, you can invest in funds where money is pooled with that of other savers and invested in a range of companies.

Using platforms makes it very accessible if you are confident enough to choose funds to invest in yourself. Many of them offer very easy-to-use research so you can read all about how the funds are run.

If you’re unsure about how and where to invest, you can talk to an independent adviser who can recommend the right selection of funds.You can search for one in your area at unbiased.co.uk or through vouchedfor.co.uk where clients leave reviews of their experiences with adviser firms.

That’s not to say you shouldn’t hold any money on deposit. It is wise to have a pot that you can call upon in case your income drops or the boiler breaks down.  After all, you don’t want to have to sell shares at a potentially bad time for this kind of expenditure.

Article is accurate at date of writing.