Case study
Mini investment masterclass
Volatile global stock markets and credit crunch fears have set people worrying about their investments and wondering how best to act.
In troubled times, investing in cash is
seen as something of a sanctuary.
This is often
a sensible approach in the
short term. However, if it’s applied to
medium to long term investments,
such as pensions, it could potentially
be damaging, as the long term
value
of cash is diminished by inflation.
For long term investments, equities
statistically provide higher returns and
greater protection against inflation than
cash deposits or fixed interest securities,
so they’re
still the best strategy, even
during the recession (source: Barclays
Capital). As
equities fluctuate, they
shouldn’t normally be considered for
short term investments.
No investment comes without some kind
of risk, but it’s possible to reduce this risk
by spreading investments across different
asset classes, such as cash, fixed
interest, property and equities, and by
investing monthly instead of all in one go.
By investing regularly in long term
savings plans, such as ISAs and
pensions, investors may benefit from
‘pound cost averaging’. This means
that the investor buys more units when
the price is low than when it is high,
making the average price paid per
unit lower than the average unit price
over the investment period, as shown
in
this table.
