Why invest?

Hello. My name is Dan Coatsworth and I’m one of the investment experts at AJ Bell.

Over a series of short videos, we will give some tips on why should you invest.

Whether you’re looking to build up enough to fund a house deposit, pay for your wedding, put your children through university or even support your retirement, investing can be a rewarding experience for so many people.

We’ve all got different reasons why people invest, but the journey we take can be similar. It involves picking a suitable investment account, identifying the types of investments that match your risk appetite and time frame, and knowing how to build and manage a portfolio.

I’ll go through all those points in this video series, so sit back and let me guide you on your investment journey.

A lot of people ask me: "Why should I invest? Isn’t it easier just to park your cash in the bank and collect interest on your savings?"

That’s a fair point and there is certainly merit in having some of your money held in cash. But the important thing to consider about investing is that you’ve got two sets of opportunities to grow your money, and potentially by a greater amount than you could get from investing in cash.

First is achieving capital growth. This means the value of your shares, funds or bonds increases over time. When you come to sell your investment, you would make a profit if those shares, funds or bonds were worth more when you exit than when you bought them. Just remember that investments can go down in value as well as go up.

The second way to make money from investing is through dividends. Companies or funds often pay out dividends two, three or four times a year. The beauty of dividends compared to interest on cash savings is that dividends often get bigger each year. In comparison, cash rates will stay the same on fixed-rate accounts. Many companies or funds have an unbroken record of growing their dividends every year, going back 50 years or more.

Some people like to reinvest that dividend money to buy more shares. So, the next time a company or fund pays out dividends, they should get even more money - if you keep repeating the reinvestment cycle, you benefit from a fantastic phenomenon called compounding.

If that’s not enough to convince you why to invest, there is a third and often underappreciated reason - and that’s to give you a better chance of beating inflation, which is the increase in the price of goods and services over time.

For example, if you’re getting 3% return on cash in the bank and inflation is at 5%, then your money will buy less in the future than it can today. But if you are making a 7% return on shares and inflation is at 5%, you’re still growing the value of your money in real terms.

Let me give you some interesting stats to illustrate what you’ve been able to get from investing versus cash in the past. While there is no way of guaranteeing this trend will continue in the future, it is worth a closer look.

Barclays has compared the returns from UK shares with other asset classes and then adjusted the figures to account for inflation. Between the start of 2003 and the end of 2022, UK shares have returned +3.8% on average, whereas cash returned -1.8% a year.

Remember these figures take inflation into account, so they’re called real returns. They imply that over the 20 years to the end of 2022, money invested in UK shares grew by more than the rate of inflation, but cash lagged behind.

This hasn’t always been the case. Over 50 years to the end of 2022, you would have got a 0.7% real return on cash - but UK shares would have still beaten cash, returning 4.5% on average each year after accounting for inflation.

In the next video, we will discuss the concept of investment goals. If you have a good idea why you want to build up a pot of money, it can really help to incentivise you to invest as much as possible. Until then, thanks for watching our tips on why to invest.