Savings are exposed to two kinds of hazards:
The first is the risk of making a bad investment, and it's easy to understand:
The second risk is more insidious, and often forgotten by investors. It is the risk of inflation. The constant gnawing away at the value of your money by increases in the cost of living. Don't underestimate it.
The table below shows that if inflation is running at just 3%, over 15 years the buying power of £100 comes down to £65. At a constant 5%, it is even worse: £100 becomes worth only £49.
| YEAR | 1 | 5 | 7 | 10 | 12 | 15 |
|---|---|---|---|---|---|---|
| 3% | 100 | 89 | 83 | 76 | 72 | 65 |
| 5% | 100 | 81 | 74 | 63 | 57 | 49 |
Stock markets have a good record in outpacing inflation - a modest enough claim you might think, but not one that other types of investment can match.
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