Historically, investing in the stock market has outperformed cash in the long term
When interest rates were higher, cash savings accounts paid as much as 8% which meant it was possible to earn a decent income from your nest egg.
Older and retired people often favour this approach because their capital remains safe and they can use the interest to boost their spend. But with the Bank of England keeping interest rates so low, savers are left with fewer choices and must look further afield for income.
Historically, investing in the stock market for the longer term has outperformed cash in the long term.
Many people see investments as something only for the very wealthy and for those with expertise to consider. Yet investing can be for anyone to use as a possible way of saving for retirement or maximising income for when they stop work.
Investments can be held in different ways.
The first port of call is to use the tax breaks available in a Stocks and Shares ISA (Individual Savings Account). For this tax year you can shelter up to £10,680 (rising to £11,280 after April) from income and capital gains tax. You don’t even have to declare these savings to the taxman.
A new study from one investment group – Skandia - has revealed that the top selling funds chosen by those topping up their ISA last month were equity income funds.
This type of fund typically invests in a spread of blue-chip UK companies such as Shell, Glaxo and Vodafone, which usually pay healthy, sustainable dividends of between 4 and 5 per cent a year. These funds offer a potentially attractive combination of regular income, plus capital growth if stock markets rise. They are less risky than investing directly in individual companies because they typically spread money between about 50 stocks.
John Chatfield-Roberts, chief investment officer at Jupiter, the fund manager, said: “There are plenty of opportunities for investors prepared to take a long-term view. The shares of healthy multi-national companies with strong balance sheets that can maintain good dividends look far more attractive. Share prices may be more volatile in the short term but I would feel more confident owning a portfolio of high quality income stocks such as Glaxo and Shell, which have attractive valuations and healthy dividend yields of around 4.8% and 4.6%.”
You might have a lump sum to invest, in which case you have to purchase shares at the price quoted on the day.
Those who want to invest each month, can use a concept called ‘pound-cost averaging’ which smooths out the highs and lows in the price of investments, so you buy fewer shares when prices are high, and more when prices are low — removing much of the worry of trying to work out when is the best time to invest. This applies both in and outside an ISA wrapper.
You must be prepared to keep investments longer-term, otherwise you may be forced to sell at a low and potentially lose money.
This is why it’s important to keep some cash easily accessible. Financial advisers recommend keeping a decent level of savings as an emergency fund in case the roof blows off or the car needs some work at the garage.
It makes sense to have enough cash in easy-access savings accounts for short-term expenses such as these – and make sure you’re getting the best rate of interest you can.
Remember that the value of investments can fall as well as rise and you may not get back what you invest. If you are in any doubt you should seek specialist financial advice.
Holly Thomas' opinions are her own and for general information only - always seek independent, professional, financial advice.