According to research, just 8% of UK savers are willing to invest in high-risk assets, with almost half (49%) preferring to adopt a moderate-risk approach.
The data shows that 26% of pension savers have shown a preference for a low-risk saving strategy in a bid to limit exposure to market volatility, while 17% sought no risk at all, even if this protectionist approach meant that their pensions would experience minimal growth.
This high level of risk aversion means that UK pension savers are unlikely to be exposed to the vulnerabilities of speculative stocks and shares, and their cautious strategies are more likely to see their funds steadily grow over time. But the approach also means that they’re less capable of securing a far higher level of earning potential associated with riskier investment options.
Are UK adults right to uphold a higher level of risk aversion in their savings? Or are they stifling an opportunity to grow their wealth further by avoiding more speculative investments? Let’s take a deeper look at the complexity of risk when it comes to wealth management:
Savings or Investments?
Before we look deeper into the differences between saving and investing, let’s define the two wealth management strategies to help you out if you’re stuck deciding whether to invest or save.
Saving refers to the act of putting your money aside to reach your financial goals without taking on risk. Your goals could equate to a one-off purchase, a rainy day fund, or just expanding your wealth.
Typically, savers put money into a savings account with a bank with a fixed rate of return that’s generally linked to the Bank of England’s base rate of interest. Because savings accounts from reputable banks or building societies are regulated by the Financial Services Compensation Scheme (FSCS), you’re able to access your savings even if your account provider goes bankrupt, underlining the safety of the approach.
Investing, however, refers to the buying of assets like stocks or government bonds at a price in the hope that they will increase in value over time.
Rather than accessing a fixed AER like with savings, investing is more speculative, and there’s no guarantee that your strategy will appreciate in value over a given time period.
Despite this, the speculative nature of investing generally means that your investments have more growth potential over the long term because you won’t be tied to fixed rates in the same way that savings are.
Thanks to the evolution of investment platforms, it’s become easier than ever to begin investing, and you can either open accounts like a Stocks and Shares ISA that’s managed on your behalf or individually choose your investments via an online brokerage.
How Risky is Investing?
While investing certainly carries more risk than saving, history suggests that the opportunity for growing your wealth far outweighs the dangers of losing out on your holdings.
Using ISAs as an example, the investment-focused Stocks and Shares ISA has averaged an annual return of 9.64% over the past 10 years, while the savings-based Cash ISA has managed to return 1.21% per year, on average, over the same period.
This doesn’t always mean that investing outperforms saving. In 2022, as interest rates were hiked by the Bank of England to combat high inflation and market sell-offs in the US drove many stocks lower, Cash ISAs briefly outperformed their Stocks and Shares counterparts. However, historical trends are broadly in favour of the long-term value of investing.
The resilience of global stock markets is also a source of optimism for investors. While economic downturns can often hit the pockets of stock market investors, markets have always made a full recovery in the long term.
The United States has experienced three recessions in the 21st Century as a result of pressures from the dot-com bubble bursting, the 2008 financial crisis, and the COVID-19 crash more recently in 2020. Despite this, the S&P 500 has recovered to post fresh all-time highs in all circumstances.
With this in mind, investing certainly benefits individuals who adopt a more long-term mindset and are less influenced by short-term market volatility.
Aligning Your Financial Goals
The United Kingdom may favour a risk-averse mentality when it comes to building wealth, but there’s no right or wrong way to manage your money.
If you’re unsure of how to best put your money to use, consider your financial goals and how they can be best achieved.
For savers seeking to put their money away for a purchase in the near future, like a car, or to build a nest egg that’s easy to access simply should a rainy day arrive, opening a safe and predictable savings account could be the best option.
On the other hand, if you’re looking to significantly grow your wealth over a longer-term basis, the historical outperformance of stocks and shares shows that there are plenty of opportunities to take advantage of on global markets. Just be mindful that the value of your investments could go down as well as up.
Whether you’re saving or investing your money, growing your wealth is a great way to plan for your future. By exploring your financial goals and shaping your strategy around them, you can create a sustainable plan that suits your needs.