Why should I invest?
The reason why people invest is varied. You need to be very clear on your financial goals to decide if you should invest. Specifically, you need to know which of your goals are short-term, and which are long-term.
- Short-term goals are things you plan to do within the next five years
- Medium-term goals are things you plan to do within the next 5-10 years
- Longer-term goals are ones where you’re won’t need the money for ten years or more
For your short-term goals, the rule is to save into cash deposits. The stock market may go up or down in the short term and if you invest for less than five years you might well make a loss.
For longer-term goals, it’s often best to invest because inflation can seriously affect the value of cash savings over the medium and long term. The stock market tends to do better than cash over time. The longer you can leave your money, the more chance you have of making a profit.
For the medium term, cash deposits may sometimes be the best answer, but it depends on how much inflation risk you are willing to take, and whether you need a certain sum on a certain date.
You can adjust the level of risks you take when you invest by spreading your money across different types of investments – called diversifying the risks.