Save for the short term but invest a lump sum for the long term

Saving and investing often go hand in hand. Both are important, and the role they both play will depend on your time horizons.

Saving is typically for shorter term goals whereby you build up lump sum savings for a specific reason or event. It could be an emergency fund for a rainy day or something specific such as a holiday or wedding. Whatever the reason, it’s likely to be money you need to access to in the short term and not money you want to lock away.

Investing however, is a medium to long term strategy. Its money you place into a portfolio with the intention of leaving it to grow over a period of time.  Investing is generally more long term (3-5 years is regarded as a minimum) than saving and there may or may not be a specific goal in mind.

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Saving and investing are not mutually exclusive. It’s quite possible that you are both saving and investing at any one time, with different goals in sight.

However, if don’t need access to your money over the short term, you do need to consider the long term effect inflation can have on your savings, especially considering the return you get these days on lump sum savings accounts.

With interest rates at an all-time low, and not expected to change for the foreseeable future, the return you get from lump sum interest accounts is minimal. Over time, the increasing cost of living i.e. inflation can eat into lump sum savings, meaning your money will depreciate over time.  While it can be important to keep money in cash, it’s equally as important to consider investing over the longer term.

But when it comes to investing, you need to make sure you have a diversified portfolio that is tailored to you. It needs to take account of your personal circumstances and goals and also the account for the level of risk you are willing and able to take with your money.

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A diversified portfolio is the investing equivalent of hedging your bets. Not putting all your eggs in one basket or not putting all your faith in one outcome. Diversifying your portfolio doesn’t make investing risk-free, but it certainly makes it less risky than it could be.

The way in which you might diversify your portfolio (the amount of money in each respective asset class, and the actual asset classes you use) will primarily be determined by the level of risk you intend to take. For example, a riskier portfolio might have more money in emerging market investments and less money in cash related ones.

By having money in a number of different areas, your portfolio’s overall performance won’t be dictated by a single asset class. This is advantageous because, no-one knows how a given asset class is going to perform over time.  If we did, investing would be much easier – we’d just put all our money in whatever’s going to rise the most.

Spreading your money across a number of different asset classes and sectors provides an element of balance to your portfolio.  Asset classes often move inversely with rises and falls being correlated. This means that when one asset class rises, another falls so an investment portfolio can benefit from diversification. And reduced volatility can be positive for both your portfolio and your own peace of mind.

But if you’re not an expert or are new to investing, how do you make sure that your portfolio is diversified appropriately and tailored to your risk?

This is where taking investment advice is important. If you don’t have the time, inclination or know how needed to create a diverse and risk appropriate portfolio, it’s important to take advice and get someone to do it for you. These days, this doesn’t have to mean seeing a Financial Adviser. The emergence of online investment advice has made this service fully accessible and much more affordable than it once was for investors.

With Wealth Horizon, you can have a FREE investment proposal that is created just for you and fully checked for suitability. Your investment portfolio can be implemented quickly and an award winning investment team will then manage your portfolio for you.

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Any news and/or views expressed within this article are intended as general information only and should not be viewed as a form of personal recommendation. This article is not directed to, or intended for distribution or use in, any jurisdiction where such distribution would be prohibited. To the extent permitted by law, Wealth Horizon accepts no duty of care or liability for loss occasioned to any person acting or refraining from acting as a result of any material contained within this article. Where past performance is shown, this should not be taken as a guide to future returns. Investment in the stock market is not a suitable place for short term money. The value of investments and associated income may go down as well as up and you may not get back the full amount invested.

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