According to data from the Office for National Statistics, the savings ratio (that is the proportion of household income that is allocated to savings) actually increases during a period recession. This is important when thinking about long term investment.

Of course, we are not technically in a recession yet; although with house prices falling and the rate of growth in gross domestic product slowing, it certainly feels like it to some.

The reasons for an apparent propensity towards increased ‘nest building’ during a recession are probably varied and largely psychological. This does not, however, imply that it is illogical to do so. After all, although disposable income is squeezed in inflationary times – you need only consider the unbelievably fast rate in the rise in energy and food costs to know that – people tend to expect things to get worse and therefore have a tendency to restructure their financial lives so that they have more put aside for later on.

It is likely that much of this increased saving is directed towards cash (including within ISAs) and there is much sense in this, because there is clearly an expectation that access to the money will be required within the short term. This means that the costs and volatility associated with equities makes it difficult to use them in such a situation. Conversely, it is important to keep an eye on the ‘bigger picture’ so putting too much money into cash, some of which may not be needed in the short term, can mean that you loose out on potential investment returns.

One of the insurance industry’s leading consultancies, Cazalet Consulting points out that the average total return outperformance of UK equities over long term gilts (similar to cash) over each of the past 20 rolling 20-year periods is 3.8% per annum compound. Since cash returns, net of tax where applicable, seldom do much better than inflation, investing in equities is often seen as the best way of achieving positive returns.

As a result you may feel that, while saving more is a great idea, putting everything into cash will certainly provide security (currently up to £35,000 per customer for each bank) and offer ease of access to your money, the trade off in potential loss of investment growth makes it important to be flexible in how you invest.

One good point is that if you decide to use ISAs, and put the maximum (currently £3,600 out of a total annual allowance of £7,200) into cash, you can later switch this into, without affecting your investment allowance when you make the change.

On the other hand, investing in equities immediately might make sense if you believe that markets are likely to recover soon. After all, buying at the bottom and selling at the top is every investor’s dream. Unfortunately, few (including most professionals) are able to get their timing exactly right. Not everyone is agreed on the short-term future of share prices; equities should, in any event always be seen as a long-term investment.

Whatever you do, saving more for the future, especially towards eventual retirement – when you rely on pensions and other investments built up during your working life – always makes sense.

The value of investments is not guaranteed; you may get back less than you put in. It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact us.

THE VALUE OF INVESTMENTS IS NOT GUARANTEED; YOU COULD GET BACK LESS THAN YOU INVEST. NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.