Why do we see cash as safe and investing as risky when over the long-term the opposite is true?
According to analysis from Finder, £1,000 saved into a cash savings account in 2013 would be worth £865 today based on the average savings rate over the past decade and the effects of inflation.
Meanwhile, IG calculates that £1,000 invested in the FTSE 100 – the 100 largest companies listed on the London Stock Exchange – would have delivered a 104 per cent total return where dividends are reinvested over the same period. That would leave you with £2,040 today.
So long as you’re not planning to spend that money for ten years, surely investing is a no-brainer based on those numbers? Yet Office for National Statistics figures show that overwhelmingly, British savers still choose to put their money into cash accounts over taking the investment risk that a stocks and shares Isa represents.
The reason?
‘Risk is both emotional and rational,’ says Reading University’s Professor Kevin Money, a chartered psychologist and co-author of several studies on investors’ relationship with risk.
‘Risk is not good and it’s not bad. It’s much more about who you are as a person when we make choices and why we make those choices.
‘Making this as tangibleas possible can help youto judge whether you’re making a decision you are comfortable with or if you want to re-evaluate.’
Prof Money also points out that ‘the concept of time in the future is hard’.
‘A year is a long time to live through, let alone a decade,’ he says, explaining that most people judge themselves from the position they are in day to day.
‘Even if there is a gain at the end of ten years, it doesn’t feel good to live through the inevitable losses experienced at times during that period.’
There’s also the fact that what is long-term for you isn’t necessarily long-term for me.
‘This is why it’s so important for individuals to focus on understanding their own tolerance to risk, and that means understanding yourself better,’ he says.
Prof Money and his colleagues at Reading University’s Henley Business School have developed a tool to help. ‘It’s a simple questionnaire that enables us to look at both emotional and cognitive reactions to various levels and types of risk,’ he says.
It means that both how we feel and how we think combine to form our investment decisions.
‘There isn’t a right answer for everyone – it’s about what you are comfortable with personally,’ he says.
‘For a lot of people, that might mean accepting a lower financial return for more predictable peace of mind.’
If you’re not sure how you feel about risk but think you might want to try investing some of your savings, why not take the assessment questionnaire?
Almost all fund managers and independent financial advisors provide free assessments online with no obligation to invest afterwards. And where’s the risk in that?
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