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Saving vs. Investing: things to consider

While cash could be an option for your short-term financial needs (such as a rainy day fund), it’s a much less desirable option for long-term growth.
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Reading time: 5 mins

In a world of unpredictable geopolitics, unexpected inflation spikes, and financial uncertainties, the idea of stashing your money in cash with a savings account seems tempting.

While cash could be an option for your short-term financial needs (such as a rainy day fund), it’s a much less desirable option for long-term growth.

Because, as history reminds us, the investment journey isn't about avoiding rough seas, but learning to navigate and sail through them!

The pitfalls of market timing

While selling your investments during market turmoil might feel like a safe escape, there are risks to consider:

• Re-entry worries: If markets surge, re-entering at a higher level could become a mental challenge. After all, nobody likes to buy something today they could've bought cheaper yesterday!

• The good days: Historically, some of the most profitable days in the market often follow the worst ones [1] — and missing these good days could impact long-term returns.

• Timing challenges: The delay between deciding you want to invest and actually having your money back ‘in the market’ once again can make re-entering tricky.

Cash is safe — but what about inflation?

While a 5% return on cash seems enticing – especially during turbulent times – it's crucial to consider the backdrop of inflation. Historically, even when savings rates soared, they often lagged behind inflation.

It’s also important to consider that savings rates can go down as quickly as they went up. Importantly in this scenario, you’d not only miss out on the positive effect of lower rates on markets, but also potentially earn increasingly lower interest.

The duration dilemma

In the short term (up to three years), cash could be considered safe and less influenced by immediate economic changes. Equities and long-term bonds, on the other hand, are more sensitive to shifts in inflation, interest rates, and economic forecasts.

This sensitivity, however, isn't always a downside.

Despite markets moving down and up, securing a high yield (how much income an investment generates) on long-duration investments – such as equities (aka shares) and bonds – could offer long-term rewards.

This is outlined in the graph below, which represents their 25-year percentage growth change (from 30/10/1998 to 29/09/2023) across the:

• FTSE All World AW TR GBP (global equities).

• Global Aggregate (global bonds).

• UK CPI EU Harmonised MoM NSA (inflation).

• UK savings rate, represented by the UK Bank of England Official Base Rate (cash).

Please remember that past performance is not a reliable indicator of future results.

Graph showing 30-year performance of global equities, global bonds, inflation, and cash.

In the world of investing, there's no one-size-fits-all solution. But it's crucial to understand that cash, while offering short-term stability, might not be the best companion for building long-term wealth (depending on your individual financial circumstances and goals).

Investing, at its core, is a commitment to the future.

And sometimes, that commitment requires sailing directly through the storm — not waiting it out.

Please remember the value of your investments can go down as well as up, and you could get back less than invested. Past performance is not a reliable indicator of future results.

Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.

Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.


  1. https://www.cnbc.com/2022/03/09/you-may-miss-the-markets-best-days-if-you-sell-amid-high-volatility.html
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