Saving vs Investing
Why Investing Can Be Preferential to Saving With a Bank
Saving and investing are both extremely important but completely different. Whilst both can help you secure a more prosperous financial future, it is very important to understand when to consider saving and when to consider investing.
Arguably, the most fundamental difference between saving and investing is the ‘risk versus reward’ concept. Saving allows you to deposit your money with only the risk of the deposit taking institution failing, however your returns will be limited to the interest rates on offer. Investing provides the potential of a much higher return, but you take on the risk of capital loss.
Retail Banks in Gibraltar can offer returns ranging from 0.25% to1.25% annually, whereas the Vanguard Life Strategy 20% Equity Fund *, which is categorised as low risk, provided a net of charges return of 10.12% in 2019. In real terms, this means that depositing your money with a savings account depreciates the value of your money significantly as inflation in Gibraltar has averaged 2.7% for the last 10 years or so. On the other hand, investing your money in the Vanguard Life Strategy 20% Equity Fund would have provided you with a returns of 7.42% after inflation. This is illustrated in the table below:
Value of Savings/Investment after inflation of 2.7%
|Savings (0.5%)||Vanguard Life Strategy 20% Equity Fund (10.12%)|
|After 1 Year||£9780||£10,742|
|After 5 Years||£9149||£14,303|
|After 10 Years||£8370||£20,457|
To summarise, if you are looking to save for a short period of time, then your money is better off in a savings account as it will remain easily accessible and protected from capital loss as long as the deposit taker remains solvent. If on the other hand your objective is to save for a longer period, and you are prepared to take some risk with your capital, then investing should be considered.
Talk to one of our investment advisers to discuss how a personally tailored investment portfolio can be designed to suit your financial circumstances and help you reach your financial goals.
By Aaron Santos
* Risk Warning
Past performance is no guide to the future and the value of investments can fall as well as rise including the income derived from them
Source; Vanguard Life Strategy Fund Fact Sheet dated 3rd February 2020.