If your money is set aside for the long term, amazing things could happen. Whether you invest in the stock market or keep your cash in a savings account, any money that you can set aside for the long haul gives you an advantage.
Why take the long view?
Obviously, most of the money we manage to make, save or invest is earmarked for something specific. When you’re 18 you might save for a holiday and at 25 you might set long term saving goals like the first rung of the property ladder. Later there might be babies and weddings and mid-life crises to pay for.
But all the while, hopefully, your retirement savings are quietly accumulating in the background along with any other money you can afford to save or invest ‘just because’.
The main advantage to long-term saving or investing is the miracle of compound returns. It’s said Albert Einstein was one of the biggest cheerleaders of compound returns. He reportedly said the following:
“Compound interest is the most powerful force in the universe.”
“Compound interest is the greatest mathematical discovery of all time.”
“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t, pays it.”
The key, clearly, is to be the person who understands and earns it – but luckily you don’t have to be Einstein to understand how compound returns works. It’s essentially a snowball effect. The initial snowball is the money you start with, and then it picks up a little bit of interest, and then you earn interest on the initial money plus the interest, and so on.
The key with compound returns is that it’s less about how much you can afford to put aside, and more about how long the money has time to grow. That’s why starting early and taking the long view is so important.
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Long term saving
The advantage of keeping your money in cash for the long haul is that your balance will always increase – just not always in real terms. If inflation outstrips interest rates, as has been the case in recent years, the real world value of your savings actually goes down. However, if you prefer the safety of cash then there are ways to maximise your long term returns.
Cash savings accounts can deliver a decent return, but only if you keep your eye on the ball. Shop around for the best deals and move your money each year in a ‘best buy’ account. This tends to be a generous teaser rate a bank offers for your first year before reducing it to almost zero in the hope that you’ll forget to move on. 1
Long term investing
As a rule of thumb, any money that you don’t need within the next ten years is fair game for investing. The stock market tends to deliver better returns than cash over longer periods of time. If you start early and top up regularly, you’ll give your investments the benefit of compound returns, particularly if you choose shares that pay dividends and re-invest the profit.
The longer your timeframe, the more risk you might consider to take with your portfolio. As long as you don’t need the money, you’re under no pressure to sell your shares. That means you won’t be affected by short-term downturns in the market – you can ride out volatility and sell when the going is good.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest.
ISA rules apply. Pension rules apply.
1. Should I save or invest my money Money Advice Service