Why invest in the Stock Market?

Stock, Cash, Bonds, Property...

With the many options available to investors it can be hard deciding how to make your money work best for you. Historically shares have consistently produced higher returns than any other form of investment. But there are risks.

The first objective in any good financial plan is to have enough money saved for your immediate needs and emergencies. We suggest an amount equal to around three to six months salary, since that provides a safety net, but you will need to decide on an amount that suits your situation.

You may need to access this money quickly so the best place to keep it is on deposit. The next step is to start building a balanced portfolio.

Shares or Cash?

You may want to mix the two depending on individual goals and circumstances. So where could you put your money?

Shares have the potential to significantly outperform cash and historically have, but their value can fall as well as rise.
As well as capital growth many shares also pay dividends.

When comparing the real returns of equities to bonds, property and cash the results favour equities. Over the past 20 years we have seen equities grow faster and produce higher yields. In fact if you had invested in a popular equity income fund 20 years ago the yield would now be over 24% of your original investment.

It is important to remember that these investments (apart from cash) can go down in value as well as up. But if you have a longer term outlook - investing in the Stock Market generally gives your savings time to recover from any foreseeable short term setbacks although volatility means there is always the chance that you could get back less than you invested.

The sooner you invest the more time your money has to grow. The graph below depicts that historically shares have outperformed the nearest competitors but please remember past performance is not necessarily a guide to future returns.

Source: Lipper. Cash based on the Bank of England Base Rate, Equity returns are based on the IMA UK All Companies, bonds returns on IMA UK Corporate Bonds, property based on Lipper Global Real Estate UK. Graph uses an average from the 18 ten-year periods there have been since the 30/12/1980.

Unlike stock markets, which can fall as well as rise, with cash your capital is guaranteed.
Many accounts allow instant access to the money.

Saving in cash is virtually risk free. However, with time, inflation will erode the value of your capital. Over 20 years, inflation of just 3% a year will reduce the real value of £10,000 to £5,438. At 6%, the longer term historical average, the real value of your capital halves every 12 years.

People who have kept too much in cash have often paid quite dearly for their caution. As the graph below shows, £10,000 invested in a deposit account in 1986 paid interest of £1,580 in the first year. However, in 2006 the interest had fallen to just £381.

Interest from £10,000 saved in a deposit account over 20 years

Over the same period inflation reduced the spending power of £1,580 to less than £790, a reduction of more than half. Savers suffered a double blow – rising prices and falling income.