Demystifying the risk of investing - part 2

I strongly believe that if you make the most of every £1 you make, by investing it, you can become wealthy….. over time.

I hear from the ladies in my Focus Finance Freedom community (link below) that the reason they don’t invest is that it feels too risky. Keeping their money in cash makes them feel more secure.

So let’s talk about the elephant in the room, inflation.

Inflation is a risk we all face

Inflation is the general price rise of the goods and services we buy each year. The impact of inflation is something we all feel.

In a recent article, ‘Cash is no longer king’, wealth management firm Tilney highlights how post the Covid 19 pandemic, inflation is a major talking point for 2021. The latest inflation figure quoted by Tilney in their article is 2.1%, higher than the Bank of England target of 2%. The fear is that inflation could ‘run away' and go even higher.

What does this mean

If the Bank of England’s target of 2% per year is achieved, every £1 you made will be worth 98p in a year’s time.

You will still have £1! However, because the price of the goods you want to buy are generally more expensive you will need to find an extra 2p from somewhere to maintain your purchasing power.

If inflation is higher than this level, as feared, then you will need to find even more money.

The impact of inflation means your purchasing power is diminishing over time.

Generating a ‘real return’ for your money

Cash is not king when it comes to creating real returns.

Real returns are those that are the same or higher than the rate of inflation.

In the UK, interest rates have been at historically low levels since the 2008 global financial crisis. The current Bank of England Base Rate is 0.1%, meaning the return you get on your cash deposits is close to 0%. Earning a ‘real return’ in cash is difficult.

Inflation is a risk that will impact the real return of all investments.

Let’s bring this to life

Let’s assume inflation is 2% and over a year you generate:

  • Bank account: 1% interest: Real return after inflation is -1% (negative return)

  • Investment account: 4% return: Real return after inflation is 2% (positive return)

You need to deduct inflation to work out the real return you’ve made. If you generate a negative real return, it means you’ve lost purchasing power. If you generate a positive real return it means you have maintained your purchasing power and made a ‘real’ gain.

What rate of interest are you being paid on your money sat in your bank account? Based on the current rate of inflation, 2.1%, have you made a positive or a negative ‘real return’ over the last year?

Real returns are really important when you are saving for the long term.

If you save £1,000 for 10 years in cash earning 0.1% each year, assuming inflation is 2.1%, your money will be worth £817, which is a loss of purchasing power of £183.

Does cash feel king now? Or risk-free and a safe place for you to keep your money?

Actions you can take to help protect your money from inflation

  1. Understand if your money is for the short term or the long term. In the short term, the impact of inflation is less important because security and access are more important. If you are saving for the long term, inflation will have a much bigger impact on the real value of your money over time.

  2. If your money is for the long term, consider starting an investment to give your money a better chance of maintaining its purchasing power and growing in value.

  3. Make sure you take enough risk with your investment. History shows that over time, on average, the stock market generally outperforms cash and inflation rates. Therefore, the more stock market exposure you have in your portfolio, without future predictions, the more chance you have of making the returns you need to beat inflation over time.

When investing, it is important that you keep enough money in cash for that rainy day and for your short-term spending needs. That way you can give your investment the time it needs to grow and generate real returns.

No predictions are being made. This isn’t advice, it is for information purposes only. I do not know your personal circumstances.

How to get in touch

If you would like to learn more about investing, as a financial coach, I can help you to understand more about your money and help you to invest with confidence.

Email me at to arrange a discovery call.

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