How Best to Invest: Cash, Stocks or Real Estate?
It has rarely been more challenging to accumulate a return on our investments than it is at the present time. When most governments are looking to stimulate growth, by encouraging spending, whilst at the same time trying desperately to avoid inflation and keep interest rates down, savers seem to come pretty low on the list of priorities. Finding ways of achieving growth to our hard earned savings pot, to enable us to survive on it throughout our retirement, requires a great deal of careful consideration. In this article we look at the three most frequently used mechanisms for savers and examine which, if any, is likely to provide that much needed inflation-beating return.
Until the credit crunch in the late 1990's, followed swiftly by the recession, which affected in most of the world's economies, investing cash in a bank to derive an income through interest was considered amongst the most effective - and safest - ways of producing a return. The collapse of many major banks revealed the myth that money thus invested was always safe and the rapid reduction in the interest rates available had an equally devastating effect on the notion that investing in a cash savings account produced a reliable and reasonable source of income. The rates of interest now offered by most savings institutions are so low that they are not keeping up with the rate of inflation. This means that, over time, the savings pot will become smaller and smaller, as the interest does not keep parity with the cost of living. Interest rates do not show any sign of increasing in the foreseeable future, so it appears that cash savings accounts are likely to remain a relatively poor means of investing our money. The greatest advantage is that, compared to other vehicles, bank accounts are still considered to be the safest havens for our funds. They do also provide a certainty as to the return that will be achieved, however low it may be.
Stocks and Shares
Probably the investment model that causes the most trepidation to savers is the stock market. Whilst it is undoubtedly the most risky, carrying the possibility of the total loss of an investment, it usually provides the highest rewards. As long as risk is spread evenly and solid, reliable advice is obtained, and an investor is able to ride out some short term losses, investment returns that beat the rate of inflation easily can provide a steady monthly or annual income. With less hassle than investing in the property market, whilst carrying the potential for higher returns than cash savings, but with much more risk, investing in stocks and shares is not to be taken lightly and is most suitable for those who are willing to invest their money over the medium to long term.
In the light of the low return on cash savings and the risk involved in investing in stocks, coupled with the general fall in property prices, many investors decide to put their money into real estate. This type of investment can work in three ways. Firstly, a fast capital return can be sought by developing a run down or derelict property and selling it on at a profit. Secondly, a slower return can be achieved by retaining the property whilst house prices continue to rise to what might be considered the optimum level to sell. Finally, a regular income can be derived by renting the property out to tenants during the period that it is owned. Significant returns can be achieved on real estate but it should be remembered that house prices can fall as well as rise and that house letting can be a frustrating and expensive enterprise if the wrong tenants take up residence. Nevertheless, bricks and mortar are likely to continue to be popular for those who are interested in investing in the property market, particularly in the field of long-term investment.
Our examination of the three principal means of seeking a return on our capital investments reveals that there is, in fact, no perfect solution to the problem. All savers are different, having different income needs, being willing and/or able to invest varying capital amounts and possessing differing risk indexes. Whether looking to invest in cash savings, real estate or stocks and shares, the clear advice should always be to think carefully about that exactly you would like to achieve with your savings and what degree of inconvenience and risk you are prepared to entertain before selecting your preferred investment model.