Should you invest your money to achieve long-term financial goals or keep the money safely in cash?
It’s a common dilemma and can be a difficult decision, especially for first-time investors who are yet to experience the ups and downs of stock market investing.
History tells us that investments typically outperform cash over longer periods of time.
New research has shown that those who invested in a stocks and shares Individual Savings Account (ISA) 15 years ago could have enjoyed gains of almost double those experienced by individuals leaving money in cash over the same period.
The research from Fidelity International also pointed out a gender difference when it comes to the preference to invest or leave money in cash.
Almost half of women prefer to save in cash, which could be detrimental to achieving their long-term financial goals.
This is supported by new figures from HM Revenue & Customs (HMRC) which show more women subscribing to cash ISAs than men. More men than women were shown to invest their ISAs than open a cash ISA.
Fidelity carried out analysis based on using the full ISA allowance invested in an index tracker fund which aimed to track the performance of the FTSE All Share and compared this to average cash savings rates over 5, 10 and 15 years.
This analysis demonstrates the cost of cash, with the investment worth £20,174 more over 5 years, £55,541 more over 10 years and £104,217 more over 15 years.
They concluded that, by taking the plunge and investing in the stock market, women (and men) can reach their financial goals sooner. These financial goals might include building up a deposit for a first home, paying school fees or saving for retirement.
Earlier research from Fidelity in their Financial Power of Women report found that 43% of women were likely to save using a cash ISA in the next two years compared to the 19% who said they would invest via a stocks and shares ISA.
This was finding was based on a survey of more than 1,000 men and 1,000 women, who were asked about their views on money and investing.
Maike Currie, Investment Director at Fidelity International, said:
“Many women will have long-term goals and diligently stick to these whether saving for a child’s education or putting something away for a comfortable retirement. But while we tend to be diligent and committed savers, we often steer clear of the stock market altogether.
“Factors such as the gender pay gap, time off work to cover childcare and more women engaged in part-time work already contribute to a significant gap in women’s’ earnings versus their male counterparts. That’s why it’s important not to put yourself at a further disadvantage by not making your money work as hard as you are. With interest rates at record lows for almost a decade now and inflation rapidly rising, anyone holding an investment in cash will struggle to achieve a decent real return -that’s a return that keeps abreast of rising prices.
“Granted, the stock market is a riskier option than cash, but it is a well-established fact that over the long term equities tend to outperform cash. Women risk falling into a glaring ‘investment gap’ by leaving their money languishing in cash. Don’t lose out over the long term and run the risk of missing out on your long term financial goals - take the plunge and get invested.”
There is of course an important role for cash in long-term financial planning. It’s usually recommended to hold a short-term cash emergency savings fund in order to cover essential expenditure for between three and six months.
Cash is also often preferable to investments where there is a short time horizon for your financial goals, such as buying a property in the next few years. Because investments can go down as well as up in value, the certainty of cash is important where a known amount of money is required in the short-term.
But for longer-term financial goals, including retirement planning, the buying power of cash will typically be eroded by price inflation over time. Investing money does involve risk and exposure to volatility, so you need to have sufficient tolerance for risk, capacity for any losses and the need to experience investment returns to achieve your financial goals.
Do get in touch if you would like to talk about the difference between saving in cash and investing your money, and how to determine a suitable allocation of cash and investments within your portfolio.