Investing can be a key way to help your money grow over time. Whether you want to be more comfortable in retirement or you’re saving for a once-in-a-lifetime cruise, finding the right investment can help you reach your goals sooner and teach you how to manage your money.

However, investing your money does come with a certain level of risk. Although these risks are clearly explained in the key information documents for all our financial products, it is still important for investors to have a broad understanding of the factors that can affect their investments' performance.

In this article, we will be exploring five key factors that can affect investment performance.

Please note: Sheffield Mutual is not a financial advisor. If you need financial advice, you should contact an appropriate financial advisor, and this service may be chargeable.

How Can The Economy Affect My Investments?

A variety of factors can influence the value of your investments, ranging from broader economic trends to individual business decisions. Below, we outline some of the most common factors that affect investment value.

Interest Rates

‘Interest’ is the additional value that is added whenever money is borrowed. In the UK, the Bank of England sets the interest rate after reviewing the state of the economy.

If you spend money on a credit card or take out a mortgage, you are effectively ‘borrowing’ money from your bank. As a result, you will pay back the amount you borrowed, plus the amount of interest that was agreed upon when the loan began.

Similarly, if you have money in a savings account, the bank will pay you interest.

The impact is that when interest rates are high, it costs more to borrow, and savers will earn more interest on their bank accounts. These conditions often lead to fewer people investing and more people saving, since cash savings offer a good return with less risk.

When interest rates are low, borrowing money will be cheaper, and people will earn less interest on their cash savings. This often leads people to invest more, hoping to increase the rate of return.

Inflation

Inflation is the rate at which the price of goods increases over time. When inflation is high, the cost of living rises quickly; when inflation is low, it rises more slowly.

Although inflation does mean that cash becomes less valuable over time (because the same amount of money can no longer buy the same amount of products), a small amount of inflation is actually a good thing. This is because a small, controlled amount of inflation means that the economy is growing.

Inflation can also affect how investors allocate their money. Saving money in cash, such as in a regular cash savings account or an investment like Premium Bonds, can leave investors vulnerable to inflation, as the value of their cash will decline over time. However, investing in businesses or products like Stocks and Shares ISAs, including Sheffield Mutual’s Single Premium Investment ISA and Regular Premium Investment ISA, can be one way to help protect investors from inflation, as their investment may increase in value as the business grows.

Consumer Confidence

Consumer confidence is a key factor affecting investment performance.

When investors are confident that things are going well, they will often seek to maximise their returns by investing as much as possible. In turn, this will improve the performance of the businesses they invest in, as they have access to more money to grow.

However, if investors lose confidence or become more cautious, this can have the opposite effect. If too many investors choose to save rather than invest, businesses will have less money available, which could slow or even stop their growth. This could then create a vicious cycle, as slow growth could lead to even greater loss of confidence, prompting people to invest even less.

Availability Of Money

When we talk about the availability of money, we’re talking about something called ‘liquidity’.

Liquidity is the amount of cash that a person, business or financial institution has access to. 

When financial institutions have access to a lot of cash, it makes it easier for them to lend to businesses, which can help businesses grow.

However, liquidity is a delicate balancing act for financial institutions. Maintaining very high liquidity, i.e. keeping a lot of money in cash, can sometimes be too conservative and slow business growth. However, holding cash back also serves as a counterbalance to risk, meaning that if unexpected economic circumstances arise or businesses start to fail, there’s a ready-made safety net to ensure that banks can pay their obligations and protect their investors.

This means that banks have to maintain a balance and, depending on how conservative they are with their cash reserves, this can speed up or slow down business growth, which can impact investments. 

Innovation And Technology

Sometimes, the biggest factor affecting investment performance is the introduction of a new technology or product.

When the first iPhone was released in 2007, it not only created a huge demand for Apple products, driving up the company's investment value, but also improved the investment value of other technology manufacturers. Screens, hard drives, and microchips suddenly surged in demand, which meant companies that make those products could charge more, boosting the value of their businesses.

Today, we are seeing a similar pattern emerge with businesses using AI technology. Although it is still unclear what the long-term impact of AI will be on investment performance, it is undeniable that AI technology has already led some businesses to achieve huge returns and others to decline in value.

Although it is impossible to predict how new technologies will affect business value, their impact can be massive. Predicting the outcomes of emerging technologies is risky. It may be best avoided, but it is essential to be aware of significant changes and to remember that the investment landscape can change quickly and in unexpected ways.

Find New Ways To Invest With Sheffield Mutual

At Sheffield Mutual, we offer a range of products for our customers, including Stocks and Shares ISAs, Bonds, and Tax Exempt Savings Plans.

Although investing might make some people nervous, many of our products offer a ‘sum assured’, a guaranteed minimum return on your investment, allowing our members to invest with confidence. In addition, members can earn bonuses on top of their sum assured, further increasing their potential returns (although bonuses are not guaranteed).

If you are interested in becoming a member of Sheffield Mutual but aren’t sure which product is right for you, try our handy product selector to see if you can discover an investment that is right for you, or contact us with any questions you might have.

Alternatively, if you’d feel more comfortable speaking to someone over the phone, please call us on 01226 741 000 to speak to a member of our team about our products and the benefits of membership.

This article provides generic information and the writer's opinions and should not be relied upon for investment decisions. Sheffield Mutual has provided no advice. If you doubt whether a savings or investment plan suits you, consider contacting a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk or www.vouchedfor.co.uk. Advisers may charge for providing such advice and should confirm any costs beforehand.