Today I am going to focus on inflation because I get asked this question a lot about investing. My clients want to know why they should risk their hard-earned cash by investing in volatile asset classes and I always reply with one word: Inflation.
Just to be clear, what this means for our money is that in real terms the buying power of our money goes down. So, if the inflation rate is 2% that means something costing £1 now would cost £1.02 next year. This means that buying the same goods and services valued at £1,000 in 2000 would cost £1,600 in 2017. This assumes an average inflation rate of only 2.8% a year. (Source Bank of England Inflation Calculator.)
If Inflation is Higher Than Interest Rates, Investment is a Good Strategy
So, people who are concerned about this need to think about investing. Especially as now, when the rate of interest earned on savings is so low.
To protect your money against inflation, one of the most popular strategies is to invest in the stock market. This type of investing is good for both big and small investors; you can invest large lump-sums or regular amounts monthly.
Investing in the stock market gives people a real chance to create wealth and for money to keep pace with inflation in real terms. By investing in a well-diversified portfolio, you can mitigate the risks that come with stock market investment. Whilst there are no guarantees, diversification aims to maximise return as each asset class reacts differently to the same event.
The right investment strategy will also help to pay for long term goals. Like the holiday of a lifetime, university fees, retirement, etc.
So, if you have cash that is in a bank account and isn’t needed for the next 5-10 years, think about the effect of inflation on it. It’s going to impact adversely on the buying power of your money, so talk to a financial advisor about the best investment strategies for you.