Money journo Holly Thomas: Five things you might not know about investing - but should
One of the ways to make savings work harder is by investing them, once you are comfortable you have a trusty rainy day cash account sorted, of course.
Many people feel intimidated by investing and end up putting it off - or not investing at all.
I've been writing about investing for national newspapers for more than a decade, which has given me an insight into how it all works.
Here are five things you may not know about investing that might give you to confidence to get started.
1. Not investing can be an expensive mistake
Stock market investing is of course far from risk-free and as a result of wanting to be cautious with cash, many savers stash their money in bank and building society deposit accounts where they can see it.
Up to £85,000 of your money is secure in a bank or building society through the Financial Services Compensation Scheme.
But there is actually a huge risk to the real value of that money sitting in these accounts, thanks to the corrosive effects of inflation.
If you are prepared to take some risks with your savings, investing in the stock market offers the chance to beat interest from the high street banks and potentially generate a better return on your money.
If you had invested £10,000 into the FTSE All Share index 20 years ago and reinvested all dividends you would now have a pot worth £29,020. That growth is equivalent to an annual interest rate of 5.4%.
If, however, you had invested £10,000 into the average UK savings account over the same period, you would be left with a vastly reduced sum of £12,741.
That's less than half the amount of money!
2. The benefits of a pooled fund – spread the risk
Instead of buying shares in individual companies it’s possible to invest in a fund which then invests in a number of underlying companies.
Money is pooled with that of other investors and, for a fee, invested by a fund manager who analyses the stock markets for companies to invest in which she/he believes with flourish in the future.
These can be UK based, or companies in other countries or regions, in many different industries and sectors.
Spreading the risk across a greater number of different stocks, rather than limiting yourself to a handful, means that you are likely to suffer less by the failure of any single company.
While some companies in a fund might suffer losses, others may perform strongly and cancel out those losses.
3. The power of compound growth
Compound growth, which Albert Einstein (possibly) called the eighth wonder of the world, can seriously boost your savings.
In simple terms if your money earns a return in the first year and in the second year both the original cash and any return from the first year will benefit from any growth.
This snowball effect continues each year that returns are made and is referred to as compound growth. The effect is so powerful that you could save less for longer and still be better off than saving a lot in a short time.
4. You don’t need to be a big earner to invest
Not everyone can afford to save as much as they would like each and every year, but putting a little something away every month is better than doing nothing. Over time even small contributions could build up to a sizeable fund.
For example investing just £20 a month can grow to a fund of £8,116 after 20 years (assuming 5% compound growth per annum). Not bad when you consider that’s around just a fiver a week. If you increase the monthly amount as your salary grew, the pot would grow even bigger. Performance is not guaranteed though and the value of investments can fall as well as rise.
5. Your money could help the economy
Without investment the economy would suffer as businesses would not be able to raise money to develop and expand. Not only that, you can invest in companies that are contributing to having a positive environmental or social impact.
Read more: Is investing for me?