Everybody knows it’s a good idea to have cash. If you need to make a quick purchase or encounter an emergency, cash is there and ready to spend. However, if you’re planning for the future, it might be an idea to invest some of your hard-earned money.

Cash held in a fixed-term savings account or put into ‘money market’ products – funds that invest in high-quality, short-term debt, cash, and cash equivalents – could give a degree of safety. Fixed-term savings can be particularly useful for specific goals on the more immediate horizon because you can lock-in an interest rate, usually over a year or two.

But for growing your money over the long term – five years or more – investments could act differently to cash because they can involve buying a share of a company, or ‘equity’.

Equity markets historically adjust to consider or ‘price in’ variables such as inflation and interest rates, as well as other factors such as supply chain shortages. This means equities often move down ahead of the impact of these variables on the economy, and then rise ahead of a recovery. 

Investing for the long term

However, equity returns are unlikely to be as steady as a fixed rate in a savings account. Equity prices can rise at different times and in different markets and sectors.

Therefore, it could be beneficial to stay invested in equity markets for the long term to make the most of any rises and the value they could offer.

Historically, investing in equities has been shown to deliver returns above inflation, as companies grow over time. By remaining invested for a longer period, that growth could be reinvested, meaning your returns could compound over time.

Do remember, though, that the value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance.

Investing vs inflation

While inflation can eat away at cash reserves, investing could help protect against rising prices because the companies in which you invest may have the ability to pass increasing costs on to customers, meaning their earnings are less sensitive to rising prices. Historically, corporate equities have shown they can help deliver returns that rise above inflation at times.

Diversity

One way to counter the risks involved in investing is to hold a diversified investment portfolio. Diversified portfolios hold equities in different markets, regions and industrial sectors. This means they have a limited exposure if one sector performs badly – and that they are also exposed to sectors that may be experiencing growth.

A diversified portfolio will also hold other assets such as bonds – or government or corporate debt. These can pay back a fixed rate over time and also be traded. Some fixed income bonds such as government debt are seen as a low-risk investment, and a good way to offset the higher risk of equities. Typically, although not always, when equities fall, bonds rise as investors move to the relative safety they can provide.

A diversified portfolio will also hold some cash, which can be invested quickly if the time is right and the asset managers see an opportunity. By holding a range of assets for a long period, such as through the funds managed by Coutts bank that sit behind NatWest Invest, you may be able to realise returns over and above inflation.

Cash will always be important and useful. But over the long term, an investment portfolio that holds different assets in different markets could help you grow your wealth so it meets your future financial goals.

NatWest Premier offers a range of diversified investment options, managed by the Asset Management team at Coutts bank. Find out more.

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the NatWest Group Economics Department, as of this date and are subject to change without notice.

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