In the first year of investing, you generate returns on your initial investment. In order to beat inflation, your money has to generate a return better than the prevailing inflation rate - and that’s where investing comes in.Ĭompound returns are sometimes referred to as the eighth wonder of the world.
So, while the actual number remains the same, it will be worth far less in years to come. This is what inflation does - it lowers the value of our money over time.
Source: ONS Internal Purchasing Power of the pound (based on RPI) Let’s look at the effect of inflation on £100: Nowadays, most people make more than that in a day. When your relative first bequeathed you that money, back in 1975, it would have been the equivalent of about a month’s wages. You’ve just discovered that your distant relative has left you some money in their will, but you might be disappointed when you realise it’s just £100. This is because of inflation and, with interest rates being so low, there is the risk that your hard earned savings will slowly lose their value in real terms, in other words, they won’t buy you as much as they once would have done. When you think back a few years, you might remember things being a lot cheaper - the average loaf of bread for example, or a first class stamp. This is bad news for your cash savings as interest rates are very low. Inflation right now is quite low, but historically it has been much higher. The longer you invest, the more likely you are to generate greater returns. Investing for one month ups your probability to 63.9%, investing for one year boosts your chances to 82.1% and investing for 10 years or more pushes it to 99.4%. But long-term investing dramatically increases your chances of making positive returns. Looking at UK stock market data since 1969, you’d have had a 55.2% chance of making gains if you’d invested for 1 day – similar odds to the toss of a coin. The longer you invest, the less likely you are to lose money. This means how long you leave your money invested. The other important choice you make is investment term. By changing the level of risk, you can see how the range of possible returns will change. To see the sorts of returns associated with different levels of risk each type of investment, you can see a sample portfolio on our try it out page. Government bonds will be more steady, less volatile with a lower chance of loss, and emerging market shares can be more higher risk than developed market shares. As a general rule, the higher the risk, you’ll often find there’s also a the greater potential for higher return on your investment – however, it’s important to remember this may come with more chance of short-term volatility.įor example, shares in individual companies may give you large gains, but also large losses. Different types of investments tend to have different levels of risk associated with them.
Investment returns depend on the type of asset you invest in. People invest with the expectation that their money will increase in value. One reason we invest is to have the potential for a larger pot in the future.