To save or not to save? To invest or not to invest? That’s the question of the day. But rather than giving you a long-winded weighing up of both options before concluding one way or the other, I’m going to give you my opinion straight-up: You should invest.
In this article we’ll examine why investing is a better option than saving in the long-run, and look at some of the ways you can switch savings into investments.
Why should you invest?
If I told you the best deposit rate in Ireland at the moment is 0.3%, would this mean anything to you? Imagine leaving €10,000 in an account that earns 0.3% per annum. In 5 years’ time you will have earned a little over €90 after DIRT tax. IN 5 YEARS …. 90 EUROS!
If this doesn’t float your boat, what are your other options? Most of us know in our heart of hearts investing is the best way to make good returns on your savings. But the big R in the room then is RISK! Fear of losing our life savings is a major discouragement.
What most people may not understand is that there is a lot more to the investment world than just crazy stocks and shares that will have your name on the front page of newspapers. We’ll get to the “how?” and “where?” a little later but the focus of much of this article will be on the appreciation of time.
Why take the risk of investing?
The ironic reality when it comes to the value of your savings over time is that doing nothing is the only certain risk there is. As in the example above, if you earn 0.3% every year with your savings in the bank then you are certain to lose the value of your savings against inflation. “But inflation is less than 1%”! Yes, it is for now, but remember the most important factor when investing … time. If you believe inflation will never rise again then you have my blessing to leave everything in the banks and there is no need to read on (but maybe check the CSO website!). If not, let’s continue.
Should you really care about inflation?
You work hard for your money. The Government already takes a slice in the form of taxes and you do your best to be a responsible saver with what’s left. Then when you go to use your savings in the future they’re not worth what you once put away. That’s the effect of inflation and, while I’m a big fan of surprises, that’s not a nice one.
Let’s not ignore the fact that inflation is a good thing for our economy and an increasing inflation rate paves a positive outlook for the country.
How long should you invest for?
I keep referring to time as the most important factor when investing so what timeframe am I talking about? It’s not generally a good idea to invest when your timeframe is less than 5 years. The reason for this is market volatility.
We’d all love for our investments to go straight up in a perfect line and come out the other end better off without any ups and downs. The reality is there is always market volatility.
What if I told you that volatility is a good thing? I know, I’m sorry, I should have told you to put down that hot coffee before I told you that. Well, it is … when you have time on your side i.e. 5 years. If markets didn’t have ups and downs we’d either live in ridiculously inflated economies or a world filled with economic collapse.
Now I know what you’re thinking; “this guy is the eternal optimist, not only does he think inflation is a good thing but now volatility too”! Well, the only reason to be gloomy about your investment is if you watch the value of your investment go up and down on a daily, weekly, monthly, or even yearly basis.
If I’ve done my job so far, we acknowledge the need to protect the value of your savings over time against inflation. We know leaving it the bank is the only certain way not to achieve this goal. We know we need to invest to accomplish this and we know we must commit (mentally) to a minimum of 5 years invested. I say mentally because most investments will allow you access anytime. However, for investments to work for you and not against you time is your friend. Finally, we know that within these 5 years the value of your investment will most certainly go up and down multiple times, but positive returns are far more likely post 5 years compared with cashing in your investment within 5 years. Once you’ve made the commitment there really is no need to watch your investment until time has run its course.
Where do you go to save in the short-term?
The short answer is you should have a bit of both i.e. some in the banks and some invested. In the short-term (2-3 years) the banks are your friend – and now you have at least 2 friends in your savings portfolio! And I’m not just talking about now when inflation is low, I mean anytime. With the banks you’ll get back what you put in and inflation will have made little or no difference to the value of your savings in a couple of years. So, the short-term is easy. We don’t get great value for our savings in the banks, but we don’t need great value in the short-term, so it doesn’t really matter which bank you save with.
Where should you go to invest?
When it comes to investing it very much matters who you invest with. There are so many options to avail of when investing but this article is not going to detail each of them because we’d be here all day. Instead, I would first ask you to set out your medium-term savings goals. This could be anything from savings for a house extension or a new car in 5 years. Or saving for your children’s education in 10 or 15 years. Once you have a clear vision of what you are trying to achieve with your savings then you’re ahead of the game and an investment broker will be able to very easily guide you down the right path and match the investment that is most suited to that goal.
What are the most popular Investment types after stocks and shares?
I said I wasn’t going to detail all the investment options available and I am not, but I will give a general sense of what’s out there because I wouldn’t want to have written this article for people to still think the only way to invest is big bad scary shares. Instead, I will categorise some of the more popular investment channels:
- Capital protected bonds: Available for lump sum investors only usually with a minimum of €10K. They vary from 3-6 years in duration and offer 90-100% protection on your capital with features that can attract very positive returns. Ideal for the low-risk investor that wants a return better than what the banks are offering.
- Multi-asset funds: The key concept here is diversification. Your savings are spread far and wide across different assets (bonds, commercial property, shares), and different sectors, currencies, and locations. You can dictate the level or risk taken with your money (low/medium/high). Unlike many investment options out there these types of funds allow for both lump sum and regular contributions which make them very attractive for those starting off their investment journey. Some companies will take as little as €75 per month.
- Fixed asset: The opposite to the multi-asset approach. Your money is invested into one asset e.g. gold or property or steel or shares. The risk is higher because you’re reliant on the performance of one asset, but there can often be elements of capital protection and attractive returns on offer.
- Ethical investments: These are investments that only include companies that fulfill very specific criteria i.e. working towards environmental sustainability, ensuring good supply chain labour rights, etc. Ideal for the ethical investor.
So there you have it – Why investment is better than saving in the long-term. If you have any questions or comments on this topic why not write a reply below and I’ll be sure to come back to you. Happy investing!