Taking a risk on gaining some savings interest
I SAW some fascinating figures last week showing the value today of a one pound coin invested when it was introduced in 1983.
Today’s value fluctuated greatly depending on the way it had been invested.
If it had been invested in a fund that tracked the main FTSE all share index then, taking account inflation, it would be worth nearly £12 today.
If, on the other hand, it had been left under the pillow since 1983 it would be worth just 32p today, again this figure has been adjusted for inflation.
These are really important numbers and raise a couple of crucial issues.
I get lots of emails from readers telling me that when they invest they don’t want to take any “risk”.
What they mean by that is that if they invest £1000 today, they would like to have £1000 in 10 years.
So, lets assume that you invest £1000 in the bank today at a rate of zero per cent (that might sound silly but there are millions of us who leave money in the bank earning no interest).
In 10 years, you will have £1000 in the account, so your money is ”safe” and you have taken no risk.
But what happens if inflation has been two per cent each of these 10 years?
By my rough calculation, and I’m no mathematician, your £1000 would have purchasing power of just over £800. So your “no-risk” strategy could have actually lost you £200.
In other words, if inflation is two per cent each year then your money needs to grow by at least two per cent each year just to stand still.
You need to find a current account, or a savings account that is paying at least that level of interest.
And there are not many of them around today.
If you want to get ahead of the game – in other words if you want the real value of your money to grow over the 10 years that it is invested – then you need to look elsewhere.
This is what we generally mean by ”taking a risk”, because you might be investing your money somewhere that means £1000 could be £900 tomorrow. Or £1100.