Get your free $100,000 CFD trading account today

BuyPennyStocks.com - an unbiased resource dedicated to helping investors interested in penny stocks.

Advertise with Shareworld now and profit from our future
Click here for more information

ANSWER 18th August 2010

Hi Confused,

What you are being told about is the erosion of capital by inflation. For example if you had £120k ten years ago it would have been a lot of money, a lot more than the same amount now. You could have bought, possibly, a nice semi detached house for the money. But, of course, you won't now.

It is likely, therefore, that your £120k will only be worth £60k in ten years time in today's value.

In order for your money to retain its value, or purchasing power, you must make it grow. Although the rate of inflation is said to be around 3.5% to 4.5% in reality it is much higher. For example rail fares are projected to go up next year around 8%.

A savings account pays around 3% and if this is compounded it might just keep abreast of inflation (if inflation doesn't increas, which it probably will!).

You don't say how old you are or if you need to take any income from the savings so you need to decide whether you want capital appreciation or income. Are youin education, working, about to retire, or retired?

Your next decision is how to invest the money. We have seen that savings is not the complete answer and you should consider diversifying into different types of investment. As a general rule you should consider something like 60% in shares , 30% in bonds (Government, Corporate and International) and 10% in cash or near cash. The equity investment (shares) could be further geographically diversified by investing overseas, such as the emerging economies (like China, India etc.).

Hope this helps as a rough guide. You really need to talk, as they always say, to a Financial Advisor. I would suggest talking to a stockbroker rather than an IFA.