A new survey has found that almost 50% of people hold their savings in deposit accounts, preferring the security of a bank or building society to investing.
With interest rates still at an all-time low, and well below the rate of inflation, holding so much capital in deposit accounts could be a costly mistake for many savers.
The survey of 2,000 people, conducted by True Potential found that:
- Only 11% of people invest their spare capital in stocks and shares
- More men, 14%, are prepared to invest in stocks and shares, than women 7%
- Whilst 8% of people have invested in property
So why are people saving and not investing? What’s the difference between the two options? When is saving right the right option and when would investing be better?
Read on, we have all the answers.
First things first, what’s the difference between saving and investing?
As a rule savers are people who put their spare cash into bank or building society accounts, instead of using other asset classes, such as shares, bonds or property.
Savers are attracted to bank and building society accounts as their capital can never fall in value. Assuming of course they only use UK registered organisations and commit less than £85,000, the limit of the Financial Services Compensation Scheme (FSCS), to each institution.
Investors put their capital into assets such as shares, corporate bonds, gilts, or property instead of deposit accounts. Investors do not get the same capital guarantees as savers, but expect to get better returns over the longer term in return as a reward for the increased level of risk they are exposing their capital to.
Why are many savers making a mistake?
If you need access to your money in the short-term, say within the next three to five years, holding money in deposit accounts is probably the right thing to do. In such circumstances, the benefits of capital security usually outweigh the potential for better returns, which can be achieved by investing.
Over the longer term though, unless a fall in the value of your capital would cause you severe financial hardship, holding all your money in deposit accounts is probably the wrong option.
Why? There are two main reasons.
Firstly, inflation. Inflation tends to be higher than the returns you can expect to get from a deposit account, which means you are losing money in real terms. To put it another way, you will be able to buy fewer goods or services with the cash you have saved on the day you take it out, compared to the day you opened the account, despite interest being added!
Secondly returns. Over the longer term investors expect to get better returns than savers. Although, investors clearly need to accept that the value of their capital will rise and fall in line with the particular markets they are investing in, which could mean they actually get less back than they invested.
How do the returns compare?
Clearly the returns you get depend on the exact deposit account you put your savings in or assets you invest in. But as a guide we’ve compared the returns from:
- The FTSE 100
- Moneyfacts 90 day notice
- Moneyfacts Instant Access
- Inflation, measured by the Retail Prices Index
These are the total returns from each option over the past three, five and 10 years:
|Number of years||FTSE 100||Moneyfacts 90 Day Notice||Moneyfacts Instant Access||Inflation: Retail Prices Index|
Source: Financial Express Analytics
It is easy to draw a number of conclusions:
- Over all three time periods, returns from investing in the FTSE 100, have been above those achieved from cash savings
- Investing in the FTSE 100 has produced a ‘real return’, above inflation
- Savers would have seen the buying power of their capital fall over each time period, with inflation rising faster than the interest paid on their cash
When is saving right?
Everyone’s circumstances are different so it is hard to be definitive, but as a guide, saving is right in the following circumstances:
- When you need access to your capital in the short-term, for example if you are saving for a house deposit or the money is your ‘emergency’ fund
- If you are unhappy to accept any fall in the value of your capital and are prepared to get returns which are likely to be lower than inflation
- If you have a large amount of capital and the returns you can get from a savings account are sufficient for your needs
When is investing right?
Again, as a guide only, investing may be right in the following circumstances:
- When you want try to improve on the returns available from deposit accounts
- If you are able to accept that the value of your capital will rise and fall and that if you need access to your money when the value is depressed, you could lose some or all of your initial investment
- If you are happy to put your money away for a longer period of time, probably five years or more and have other capital to cover short term needs
- When you are saving for your retirement
So what’s the mistake many savers are making?
In short, leaving too much money in savings accounts, which have historically given poorer returns than investing in stocks and shares and will usually mean a ‘real terms’ loss is made.
Clearly anyone investing in stocks and shares has to accept these are longer term investments and the value will fall as well as rise.
But if you want to avoid losing money in real terms and can afford to put your money away for the ‘longer term’, you really should consider investing at least part of your capital.
To do otherwise could be an expensive mistake.
We’re here to help
Whether you are a saver looking to invest, an investor looking to review your portfolio, or you simply have a question you would like answered, our team of Independent Financial Advisers are here to help you.
Call us today on 0115 933 8433, enquire on line by clicking here, or email email@example.com