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Before starting to compare investments it’s worth having a long think about whether investing is the right thing for you. Whilst investments can outperform savings accounts for returns, they come with risks attached – risks that you should understand before proceeding.
Investing should always be considered as a longer term undertaking – anything from 5 years upwards. So the money you invest must be cash that you don’t need to access for a fair while.
If you do need to get at your money you could face hefty penalties. This means that cashing in an investment in the early years could result in you coming out with less money than you originally invested.
The other point to make is that a longer term investment has more chance to grow because it can even out short term fluctuations in investment performance. You would also want to avoid cashing in an investment when the market has fallen, as this could result in you making a loss.
When compared to a savings account, the potential returns on an investment can be far higher.
But the flipside to the potential reward is the risk of losing some of the money you initially invested, if your investments don’t perform so well.
A savings account works in a different way…
When you put money in a savings account the bank or building society invests or “lends” your money to other people who need to borrow. Part of the interest payments from the borrower are passed on to you, as interest on your savings. If the people borrowing your money can’t afford to repay, the bank or building society absorbs the loss and doesn’t pass it on to you.
So the essential difference between a savings account and an investment is this:
With a savings account the risk of losing money through a bad investment is with your bank or building society. However, with an investment the risk of losing money sits entirely with you.
Whether this risk is worth the potential reward depends on how you feel. Would you be happy to lose money on your investment for the chance to earn more? Generally speaking, the greater the potential reward, the greater the risk you are taking.
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