Why invest?

Sometimes it is a good idea to take a step back and ask ourselves fundamental questions.

If we knew that we would always have sufficient income to cover our needs, there would be no point in saving; instead we could enjoy all our income immediately and let tomorrow look after itself. Some might argue that there is already a “lost generation” which does behave in this manner – but parents have probably always thought that about their children!

In fact, investing fulfils a very basic need within humans to protect and provide for their families. After all, without life assurance and income protection cover (which is a form of saving) many families would find themselves almost literally destitute on the death or incapacity of a main breadwinner.

Investing is also about protecting yourself against an unknown – and, indeed, a predictable – future. By investing now, we ensure that should unforeseen circumstances arise in the future, we are able to weather the storm. But we can also provide for those costs that are predictable such as education costs, holidays and replacement cars, furniture and other necessities.

For most people, investments are also a form of insurance against the longer term future; by putting aside money now, we can look forward to the ability to live more comfortably later in life, especially when we are no longer able – or perhaps willing – to work full time.

These different timeframes mean that no single investment strategy is likely to be of any real value. For example, holding cash gives short term certainty over accessibility and security, but it will almost invariably involve a loss of real value as interest rates seldom keep pace with inflation, when the effect of tax is taken into account. Over the longer term the value of cash deposits are likely to fall in real terms.

Conversely, holding equities for a short period is likely to involve not just high dealing and other costs, but also carries the high risk that values will fall just when you require access to your money. But over the longer term, shares tend to perform better than many other asset classes. They can – and do – fall in value frequently; but if the long term trend is upwards, then you can be better off with an equity portfolio for long term savings, compared with cash or government securities.

Property is an asset that most people have seen rise fairly consistently for many years – although many of us also recall a large dip in the 1990s. For most families, their home is their single largest asset – often being worth more than their pension scheme. Before considering investing in more property (especially of the same type, i.e. not commercial property) it is important to consider that holding too much money in any one asset class can be risky. You may benefit from all the upside potential, but if values fall, you could be locked in to lower values without the opportunity to realise assets at anything like their previous value.

Different asset classes can sometimes perform in opposite ways. For example, if interest rates are rising, the value of government bonds will fall, as can share values. Conversely, if share values are falling, commercial property values can rise, as investors look for safe alternatives. It is not that different investments act in opposite ways; simply that there is generally no direct correlation.

What this means is that by holding a diverse portfolio of assets, you can expect some to do well when others are underperforming, so that the peaks and troughs are evened out.

If you require any further information about the services that we provide or would like to review your financial planning position, please contact us

Investments Articles