Interest rates are low, the cost of living may be rising faster than your savings are growing – it is difficult to achieve growth above the rate of inflation. And so, you may be in effect – losing money.
The value of a pound is not the same as it was 5 years ago or 50 years ago. Think about it. What did your Mum and Dad buy their house for? £50,000? £100,000? Whatever it was – it certainly was much less than it is worth now. In the ‘old days,’ some people kept their money under the mattress, but if you do that, you guarantee that when you take it out again it will be worth less than when you put it in!
Your savings need to at least keep up with inflation, otherwise, you are losing money over time. Whether you want to match or beat inflation will partly be down to how much risk you are comfortable with.
If you are comfortable with the reality that investments can lose money as well as gain, then you may want to invest in higher-risk opportunities, which – over a long period of time may very well outperform other investments.
Or you may want to just beat inflation and stick to lower-risk investments. Or perhaps your strategy will change over time. When you have 40 years till retirement your attitude to risk may be higher, you may feel that higher-risk investments are worth it as there is time for the markets to bounce the right way. As you age, your appetite for risk may decrease.
All of the above is fine, and your financial advisor will help you assess your risk appetite and create a portfolio that reflects that along with your goals.
One way you can stay ahead of inflation is to buy stocks that pay good dividends, and to spread your investment globally – minimising your exposure in any one market. ISA’s and Pensions are a good way to protect your earnings from investments from the taxman!
ISA’s allow you to invest up to 20k a year tax-free and you can access your money more easily. And pensions can offer tax relief on your contributions up to £40k a year, but you can’t access your money until you are 55.
Of course, it is important to understand that the value of investments and income from them may go down and you may not get back the original amount invested. Past performance is not an indicator of future performance.
However, you have to look seriously at what you are doing with your money, and whether you have strategies for avoiding the erosion of value from inflation.
Speak to us for a financial review with no obligation.
