Everybody knows it’s a good idea to have cash. If you need to make a quick purchase or encounter an emergency, cash is there and ready to spend. However, if you’re planning for the future, it might be an idea to invest some of your money.
Cash held in a fixed-term savings account or put into ‘money market’ products – funds that invest in high-quality, short-term debt, cash, and cash equivalents – give a degree of safety. Fixed-term savings can be particularly useful for specific goals on the more immediate horizon because you can lock-in an interest rate, usually over a year or two.
But for growing your money over the long term – five years or more – investments act differently to cash because they can involve buying a share of a company, or ‘equity’.
Equity markets historically adjust to consider or ‘price in’ variables such as inflation and interest rates, as well as other factors such as supply chain shortages. This means equities often move down ahead of the impact of these variables on the economy, and then rise ahead of a recovery.
Investing for the long term
However, equity returns are unlikely to be as steady as a fixed rate in a savings account. Equity prices can rise at different times and in different markets and sectors.
Therefore, it could be beneficial to stay invested in equity markets for the long term to make the most of any rises and the value they could offer. While equity markets often move up or down based on short-term considerations, in the long run they tend to reflect the growth rate of corporate earnings as well as dividends, which tend to be positive. Historically, this can potentially provide higher returns than other assets as companies grow over time. By remaining invested for a longer period, that growth is reinvested, meaning your returns could compound over time.
Do remember, though, that the value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.
Advice and product fees may apply. You should continue to hold cash for your short-term needs.