Currently, with inflation high, most people’s savings are losing value hand over fist.
So, how do you invest to try and beat it … or at least hold your own?
The mantra states that you can’t match inflation with ‘no risk’ money. Easy access accounts are still paying pitiful rates of interest. Hence, accepting the prospect of some short-term risk, a long-term strategy is required. Which probably means five years or more.
Putting your money into shares is one approach.
Assuming dividends are reinvested, the average annual return for the FTSE 100 was 7.3 per cent over the past 30 years – outstripping the 2.1 per cent average annual growth in inflation for the same period, according to wealth manager, New World Financial Group.
While it is quite understandable that people get nervous and twitchy when markets are so turbulent, as they have been recently, history does suggest that investing in shares is the most reliable way to grow your savings over the long term.
Property and gold are other assets capable of beating inflation, though that is not to say that they will. Don’t be tempted by crypto-currencies – they fluctuate wildly, potentially represent a massive ‘bubble’, might collapse tomorrow, and you could lose every penny.
A diverse portfolio with a mix of assets, including equities, property and less risky bets such as bonds is the best way to go.
You can build a portfolio yourself, but, if you don’t have the knowledge, then best to work through a financial adviser. Alternatively, leave it all to an investment fund.
Whichever, you need to recognise that you can’t win them all. Inevitably, something is going up and something is going down at any point in time.
The Times Money Mentor adds: “A way to minimise losses in uncertain times is to drip-feed your money in – known as pound-cost averaging.
“By investing small amounts at regular intervals you will sometimes invest when the market is high, getting fewer shares for your money, but you will sometimes invest when it is low, meaning you will get more. This is likely to smooth the ups and downs compared with investing a lump sum in one go, which could suddenly plummet in value if you bought just before a crash.
“The counter argument is that the smaller your investment the smaller your gain if markets soar, but in the long run the aim is to reduce volatility and end up with higher returns overall.”
One strategy is to divide your savings.
Money Mentor goes on: “It is important to set money aside for emergencies. It is often recommended that you have enough cash to cover at least six months of essential outgoings. If you kept this money in investments such as shares you might be forced to cash them in when the markets are down, meaning you could lose.”
Stick this ‘emergency money’ into the highest-paying savings account you can find.
Make the most of the tax system too.
Investing in a stocks and shares ISA means that any returns you make will be tax-free.
You can pay in £20,000 each tax year across any ISA product — whether that’s stocks and shares, Help to Buy, cash or a Lifetime ISA — but you can only open one of each type in a year.
If you are saving for retirement, a pension may be a better option. Any income you save into your pension is also free of income tax.
Remember, don’t go Clint Eastwood’s Dirty Harry route – “You’ve got to ask yourself one question: ‘Do I feel lucky?’ Well, do you, punk?”
Luck rarely comes into it!