Since the Bank of England lowered the base rate to 0.1% last March, finding a good return on your savings has been tricky. Many traditional savings accounts, including some popular National Savings & Investments products, now pay no more than 0.01% interest – that’s just £1 for every £10,000 you save.

However, you could consider investing as an alternative place to keep your money if you want to give it an extra boost.

But how does investing compare to holding cash? And could investing help you generate good long-term returns?

Your cash savings could be losing value over the long term

Having cash in a savings account is by no means a bad thing. It’s important to have money you can spend on day-to-day expenditures, as well as having some set aside that you can easily access in case of emergencies.

However, when you hold all your money in cash, it can lose value because of inflation. The Bank of England targets 2% growth per year, which means a steady increase in the cost of products and services. If the interest rate on your savings is low, your cash could struggle to keep up with the rate of inflation, meaning your money loses value in real terms.

As the Bank of England base rate has been at historically low levels for a decade, this has been particularly hard for savers. The base rate indirectly determines the interest rate you receive on your savings, as it impacts how much interest your bank or building society will pay to you.

The Bank of England has also said that there could be negative interest rates in the next six months. This could mean you’d be charged for depositing your money in savings.

Investments tend to outperform cash – and have done so for the best part of a century

If you’re holding a lot of cash and you’re concerned about it not keeping pace with the rising costs of living, investing can be a good long-term solution.

While past performance is not an indicator of future performance, looking back can give a picture of how investments tend to do versus cash.

In the Barclays Equity Gilt Study from 2019, analysts found that £100 invested in cash in 1899 would have been worth more than £20,000 by 2018.

However, £100 invested in equities over the same period would have climbed to around £2.7 million.

Of course, you’re fairly unlikely to have a century to wait for your investments to come to fruition. Fortunately, there are similar tales of success in shorter periods.

Investments in the FTSE 100 achieved an average annual return of just under 7% between 2009 and 2019. Meanwhile, over the same period, the FTSE 250 provided average returns of 11.3% per year. These returns comfortably beat most interest rates on savings accounts, as well as the rate of inflation.

Provided that you get good advice and invest carefully, long-term investments can provide strong returns.

The risk of losing your money drops the longer you hold your investment

One reason that investing puts off some would-be investors is that there can be a risk of losing money.

However, while it is possible for your investments to fall in value, research from Nutmeg shows that it’s less likely than making gains. In fact, your risk typically decreases the longer you hold your investment.

Nutmeg analysed data from 1971 to 2020, finding that a random stock chosen from the global markets and invested for a day gave you a 52.3% chance of making a gain – slightly in your favour, but not by much.

However, they also found that the longer you held, the greater the chance of a return. Investing for a single year gave a 71.83% chance of a gain, with a 93.91% chance of returns over ten years.

Similarly, when looking at developed equity markets during the same period, the probability of loss dropped to almost 0% if you remained invested for 14 years or more.

Source: Nutmeg

In the short term, investments can be volatile and lose value. But, if you can hold your nerve and focus on the long term, the chances that you’ll make a gain are well in your favour.

Diversifying your portfolio can help to further reduce short-term losses

You can also help reduce potential losses by making sure your portfolio is diversified across different industries and types of investments.

By having a bigger range of investments, you can cover yourself in case one asset class doesn’t perform too well. For example, if your whole portfolio is made up of oil companies and the oil price drops, all your investments could take a hit.

The same is true of investing across different geographical markets. Markets in different countries perform based on the wider economic situation so, if all your investments are based in one place, they could all simultaneously dip. You could mitigate this risk by holding investments across a range of regions and countries.

Similarly, splitting your money across a range of equities, commodities, gilts, and bonds can help reduce risk in case one type of investment does take a dip.

A broader spectrum of different investments spread across different industries and regions reduces the likelihood that you’ll lose money on all your investments at once.

Your investment strategy needs to be personalised to you

As we have seen, investments can statistically provide stronger long-term returns than cash. However, if you’re planning on investing to potentially give your wealth a boost, you need to make sure that your strategy is personalised to you.

A financial planner can help you design an investment plan that’s tailored to the goals you want to achieve, as well as your tolerance for risk. They’ll be able to take your entire financial situation into account and work out a strategy specifically for you.

Get in touch

Digney Grant can help you work out what you can afford to invest in and design an investment plan that matches your goals and attitude to risk. If you’d like to know more, please call +44 (0)28 3082 8880.

Please note:

The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.