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If you’ve got some spare cash, or money in savings accounts earning disappointing levels of interest, you might be tempted to invest some of it. Making the decision to invest isn’t always an easy one and it’s natural to wonder whether investing later in life is worthwhile, or if it’s too risky.
With a sensible approach, investing may deliver better returns than savings accounts and can boost your financial resilience. But it won’t be for everyone.
In this first part of a new series about investing, we’ll help you work out if it’s the right route for you.
What’s on this page?
Let’s start with some reasons why you should consider investing, and then we’ll dive into whether investing is right for your circumstances. The first is that over the years stock market investments will typically earn better returns than cash in the bank. Data from a long-running study by Barclays (going back to 1899) shows that over any given 10-year time period, UK shares have beaten cash 91% of the time. Over five years, the figure is 77%.
Looking at specific markets, over the last 10 years, the average annual return on the FTSE All-Share index has been 6.1% (including dividends), which is well above average cash savings rates for this period. The S&P 500, an index of some of the largest publicly traded companies in the US, has achieved an average annual return of 11.3% (including dividends).
A second consideration is inflation. With interest rates having fallen several times over the last 12 months, and forecast to drop further as the year progresses, investing offers a way to potentially boost your returns.
If savings rates fall further, and inflation picks up, savers run the risk of their cash not keeping pace with inflation. This means the spending power of your money gradually reduces over time. Over 10 years (January 2014 to January 2024) the average savings account lost £2,718 in real terms (based on an initial investment of £11,185, which Finder.com's research suggests is the average savings per person in the UK), according to Finder.com.
Wesley Harrison, head of financial planning at Benchmark Financial Planning, part of the Schroders group, says another reason to invest is that it can boost your financial security. He comments: “By diversifying some of your spare cash into investments, you can create an additional source of potential growth. This can help support your lifestyle in retirement, cover unexpected expenses, or even help fund later-life goals and interests.”
A third reason is having a long-term perspective. You may worry you’re starting to invest too late, but you could still have an investment horizon of 10, 15, or 20 years or more. That’s enough time for investments to weather typical stock market ups and downs.
As Holly Mackay, founder of the finance website Boring Money, puts it: “Once your timeframe is over 10 years, then the risk of not investing becomes problematic – as money that sits in cash may not necessarily keep up with the rising cost of living.”
Some people are put off investing because they feel like they are not the kind of person who invests. You don’t need to “feel” like an investor, or fit whatever stereotype of an investor you have in your head. You don’t need to be a man in a suit shouting “Buy, buy! Sell, sell!”, or be rich to start investing in the stock market. Many investment platforms will start contributions from as little as £25 a month, and some let you invest with just £1.
If you have a pension, you are already an investor. “Even if you think that investing is too risky, the chances are you’ll have a pension that is investing in the stock market if you look under the bonnet. Any company pension will invest in markets, precisely because it’s the best chance they have of making better returns over the long term. So, you probably own shares in companies such as Apple, HSBC and Samsung,” says Mackay.
It’s important to be honest about your circumstances and comfort levels when deciding whether to invest your spare cash. Here are a few key questions to consider:
Interest charges on any outstanding credit cards or personal loans will often dwarf any returns you might earn from investing. If you have expensive debts, it would usually be more cost-effective to pay these off first, before committing money to investments.
Before investing, you also need to ensure you have a decent cash savings buffer, which is held somewhere that you can access in an emergency. “We should all have at least three months’ outgoings in a savings account to cover any unexpected emergencies,” advises Mackay.
For example, if you’re still working, this money could be very valuable if you’re suddenly made redundant. Or if you need some cash for urgent house repairs, or if your boiler breaks down.
As we’ve mentioned – and as you’ve probably heard on lots of finance adverts – investments can go down as well as up. Laura Suter, director of personal finance at AJ Bell, says: “New investors need to be aware of the risks they are taking. Investing is different to keeping money in cash – while there is the potential of higher returns, there’s also the risk that you could lose money.”
Harrison says it’s crucial to consider your emotional reaction. “If short-term fluctuations will cause severe stress or lead you to panic-sell (locking in the losses), you may want to think carefully before investing, or choose less volatile investment options.”
The longer you can afford to leave your money invested, the more time you will have to ride out any short-term volatility. However, it’s a very personal decision and if investing is going to stop you sleeping at night, it may not be a risk worth taking.
According to Suter, investing is generally only suitable for money that you don’t plan to spend for five years or more. “So, make sure you’ve got your emergency savings in cash and you’ve paid off any expensive debt, as well as any money you expect to need within five years – for a big holiday, or a new car, for example. Any savings goal that’s further off than five years could be ideal for investing.”
Having a timeframe of at least five years means you should have time to ride out any ups and downs in the market. If you only invest for, say, a year, if there’s a downturn just before you need your money, you’re more likely to be left with some losses.
If you think investing could be right for you, you don’t need to become an expert to get started. “Sometimes the hardest step is simply starting, especially if you’ve always left these matters to pension providers or avoided them altogether,” says Harrison.
“Having a clear reason for investing – such as funding a dream trip, helping family or securing a more comfortable future – can be the extra push needed to act.” We’ll share much more investing wisdom during this series, so you can learn more about the basics of investing, work out your attitude to risk, and build your confidence step by step. Next week, we’ll look more closely at the main types of investments.
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