Weekly Brief: Should You Invest, Or Should You Save?

Weekly Brief: Should You Invest, Or Should You Save?

over 1 year ago4 mins

We talk a lot about the impact of inflation on the global markets, but let’s take a closer look at what it means for your personal finances.

🕰 Recap

  • The Federal Reserve’s been hiking interest rates in a bid to bring US inflation under control
  • There were no signs that the approach was working in June, when US consumer prices were over 9% higher than the same time last year
  • But they slowed down a little in July, with data out on Wednesday showing consumer prices were 8.5% higher than a year ago
  • Inflation’s been sky-high in the UK too, prompting the Bank of England’s biggest interest rate hike in 27 years earlier this month.

✍️ Connecting The Dots

Fundamentally, the reason for investing is straightforward: you want the value of your cash to increase over time by at least the amount that the prices of goods and services increase – that is, by the inflation rate. If it doesn’t, your savings will be eroded: an annual inflation rate of 3%, for example, will roughly halve the value of your cash over 25 years (and the less said about the US’s 9% and the UK’s forecasted 13%, the better).

But investing is easier said than done when wage growth hasn’t been keeping up with inflation. Even if you buy the same things you were buying this time last year, you’re probably ending up with less spare cash at the end of each month. That leaves you with less money to invest. And even then, there’s not much to be gained in light of the global stock market’s performance this year. It’s tough to gear yourself up to actually put money into markets when the short term looks as bleak as it does right now.

So you might decide not to invest at all, and just save your money instead. And while the damaging effects of inflation are very much a threat, there is an incentive here: central banks have been hiking interest rates almost as fast as they can, which means commercial banks are finally starting to increase the amount of interest they pay savers. That’s obviously a good thing after the near-0% rates on offer the last few years. Trouble is, those rate hikes still aren’t bringing down inflation fast enough, which means any gains from higher interest rates are well and truly offset by rising prices.

So between saving and short-term investing, you’re stuck in a lose-lose for the time being. That means there’s only one option: to invest for the long term and batten down the hatches until all this blows over. It’s not easy, but it’s arguably the best choice you have right now.

🥡 Takeaways

1. How to decide how much to save or invest.

Inflation may have left you with less extra cash, but the equation for deciding how much to save or invest hasn’t changed. Ask yourself how much cash you have available to squirrel away for, say, five years, how much extra money you think you’ll have each month, whether you have a specific goal you’re saving for or investing towards, how long you’re willing to wait, and how much risk you’re willing to take. Your answers to these five questions will help you understand how much cash to have in short-term savings versus long-term investments, even with the specter of inflation over your shoulder.

2. Trading is a different beast altogether.

If savings and investing are the tortoise, trading is the hare: a high-risk, high-reward strategy in which you aim to buy low and sell high in a matter of hours or days. But while it’s tempting right now, it’s arguably not worth the risk: you’ll often be pitted against professional traders who can trade faster and with more data than you, putting you at an immediate disadvantage.

🎯 Also On Our Radar

Last week, the Nasdaq Composite – the US’s tech-heavy stock market index – exited the bear market it entered earlier this year, with a 3% jump completing its 20% rise from its low point in June. That appeared to be in response to lower-than-expected US inflation data, which suggests the Federal Reserve might not hike rates – which are particularly damaging for the tech sector – as much as it would’ve done otherwise. But if future inflation data comes in higher, then, this tech stock rally could quickly turn on its head.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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