Many people have experience investing for the short-term in banks, building societies and national savings.  They are used to looking for a good rate of interest and having their capital guaranteed.  Short-term investors do not tend to worry about inflation.

Over the long-term (5 years or more) the effect of inflation becomes noticeable.  Inflation erodes the real value of capital giving deposit investors who are adding interest to their account little real return or often a real loss.

Long-term investors tend to look for things that will make a real-return.  That is to say a return over-and-above inflation.

The following chart, supplied by Scottish Widows is an excellent illustration.  It shows that over the long-term, the trend has historically been for investments in equities (stocks and shares) to substantially outperform inflation.

Even if dividends are used and not re-invested, equities still provide a much better return.

To view the chart, click here