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Risk and reward

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3. Stock market performance and inflation

Savings are exposed to two kinds of hazards:

The first is the risk of making a bad investment, and it's easy to understand:

• you invest £3,000 in shares of Rottenidea plc, and it goes bust
• you pay £100,000 for a house and 18 months later it's worth £85,000

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.

Barclays Price Total Return Indices

1. The right place for your spare money? 2. The golden rule 3. Stock market performance and inflation 4. Stock market performance compared to savings accounts 5. Specific risk 6. Market risk 7. Pound cost averaging - a way round risk 8. Overseas investments - currency risks 9. Conclusion

Recommend Reading

• Against the Gods

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