‘You have to be in it to win it’. A crude but very relevant adage for how an investor should think.

The benefits of participation can be made clear with a simple, real world, example of how savings have typically performed versus equities. I use this example because most people that do not ‘participate’ are keeping all their savings in cash at the bank. It’s an easy thing to do… you are paid in cash, your outgoings are in cash, you simply require cash. This is perfectly acceptable and every portfolio should consist of some – but holding 100% of your savings in cash at the bank is costing you money!

Lets assume 5 years ago you had saved £50,000 and have not added a penny since. All that dough in a high interest savings account* would have approximately earned you £3,774… in total. That’s a meagre £755 a year for having £50,000 in savings. If you had instead invested your £50,000 into stocks, say the FTSE 100, you would have made more than £755 in your first year. In fact, the first 12 months (running from September to August 2013) would have made you £6,140! – over 1.5x what you would have made from saving cash for the last 5 years!! In total your 50k would have grown to £65,049 bringing you much closer to meeting your long-term investment objectives, whatever they may be.

This isn’t a new or unusual phenomenon. Equity markets offer a greater return (premium) over cash but at a greater risk. The below chart illustrates the example we have just walked through. As you can see market participation (investing) is not all smooth sailing… but with a long time horizon it is often worth it.

*I assumed all savings were held in a number of leading Cash ISA’s over the entire period. Most savers to not take advantage of Cash ISA’s and instead keep their savings in low interest current accounts. These savers would have experienced even lower cash returns than I have used in my example.