Save or invest? 3 charts to help you decide

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Cash and investments play important - and different - roles - in your finances. Cash will not lose value in nominal terms (although it can lose value to inflation - more on that below) whereas investments can fall in value. The compensation for taking that risk is the chance that investments will produce a higher return. 

This is reflected in the chart above. The blue line - which shows the global stock market - is fairly bumpy. That’s because equities bounce around depending on how companies are performing, what is happening in the political arena, and how the economy is faring. Share price movements can be sharp and unexpected, as seen in 2008 and 2022.  Over the longer term, however, the outperformance of stocks has been striking.

That doesn’t mean the process has been stress free. Returns have varied significantly year to year and recovery hasn’t always been quick. It took the US equity market four years to bounce back from the global financial crisis and over seven years to recover from the dotcom crash. 

If you have a short time horizon, therefore, the smoother, shallower trajectory of cash returns may be more attractive. We’d suggest a time horizon of at least five years for investing.

In any case, it is important to hold between three and six months of essential spending in cash for emergencies. This can actually help your investing because it means you won’t have to sell investments if you need money at short notice. 

Note also that the orange line shows average savings rates - you could have generated a better return if you had shopped around. 

Chart 2: Cash can lose value - it just does it quietly

Cash is often viewed as a safe haven. After all, the face value - or ‘nominal’ value - of your cash savings will never drop unless you start spending. However, what you can buy with those savings could fall substantially. This is due to inflation, the process of prices rising over time.

The chart above shows that there have been several periods where cash has lost value in ‘real’ terms. The period between 2014 and 2024 was particularly nasty due to the spike in inflation after the Covid pandemic. When inflation is taken into account, the value of cash fell by average of 2.9% a year in this period. 

The corrosive effect of inflation is a key consideration when deciding where to put your money. The backdrop is fairly bright for savers at the moment: in October 2023, the base rate overtook inflation, reversing a 15-year trend. However, inflation and interest rates have now started to converge again. 

Chart 3: Holding shares for longer reduces your chance of losing money

History suggests that the longer you are in the stock market, the less likely you are to suffer a loss. This chart displays the best and worst annualised returns you would have experienced had you held US shares for one year, five years, 10 years or 20 years.

As you can see, the range of possibilities is very wide if you only keep your portfolio for 12 months. As your investment horizon lengthens, however, the worst-case scenario starts to rapidly improve and has turned positive by the 20-year mark. In other words, even in the worst 20-year period, investors didn’t lose money - they still made a gain.

This example is based on the S&P 500. Past performance is not a reliable indicator of future returns.

• Open a Fidelity Stocks and Shares ISA
• Open a Fidelity Self-Invested Personal Pension (SIPP)
• Read: Principles for good investing

Past performance is not a reliable indicator of future returns

Source: LSEG, total returns in local currency from 31.3.21 to 31.3.26. Excludes initial charge.