With normal savings, you’re simply adding cash to a ‘pot’ which you can then use when you’d like to spend it. Investing is different because you’re buying something with the expectation that you can sell it for a profit later, or that it will provide an ongoing income such as a dividend or rent payment.
When you invest there is a chance that you will get back less than you put in. However, it is possible to minimise the risk you take by building a diversified portfolio. Instead of putting all of your eggs in one basket, you can invest in lots of different types of assets at once - for example, the stock market, property or shares in a fund.
Investing gives you the opportunity to make a real rate of return, which is the annual profit earned on an investment adjusted for inflation.
Annual profit 6%
Real rate of return 6% minus 2.5% = 3.5%
Put another way, it is the indication of the actual purchasing power of a given amount of money over time. Inflation can reduce the value of your money, especially during periods of low interest rates.
By accepting a certain amount of risk, you can earn much greater returns over the long term.
You should only consider investing if you can leave the money invested for a minimum of five years. Early withdrawal could mean you get back less than you have invested.
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