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Thursday December 7th, 2023 

News Archive - March 2009

Savings and Investments


It's a tough time for savers at the moment. Interest rates are at their lowest point in living memory. 12 months ago you could easily get a 6% p.a gross return on cash savings, whereas anything more than 3% p.a now is hard to find. Although inflation is pretty low now, it is generally expected to rise sharply in the next few years as a result of the Government's attempts to stabilise the economy and bail out the banks. If this does happen, then the purchasing power of cash savings will be eroded. The buy-to-let market for residential property has taken a dive due to the falling price of property, and also the difficulty of obtaining a competitive mortgage without a significant deposit. The cost of overseas property has soared due to the weak pound. Investors are hunting for better returns - so what are the options?
Firstly, there are alternative investments like fine wine, antiques, or stamps. It is possible to make money investing in anything, but there are pitfalls galore. In my opinion this kind of investment is best left to the experts. Any investment of this kind can be difficult to convert back into cash. Advertisements that promise high returns from this type of investment should be given a wide berth - they are not regulated by the Financial Services Authority and they can be a refuge for con artists. The same thing applied to buy-to-let and overseas property investments, with several high-profile cases of massive fraud catching out unwitting investors who had been promised massive gains. If it sounds too good to be true - it is. Ask yourself, "if these amazing risk-free returns are possible, why don't the people running the scheme just borrow some money, invest it, and keep all the profits for themselves?". Something to remember is that higher returns go hand in hand with higher risks. If a savings product offering a potential return over 4% p.a at the moment, there will usually be some risk to your capital.
Some savings products offer a return linked to the FTSE100 index over a fixed time period, with guarantees attached. If the FTSE100 goes down over the fixed period then you are guaranteed to get back at least your original investment. The products appeal to those who are risk averse, but in practice the returns are often not much more than you could have got from a savings account. If this is the case, then the potential upside is rarely enough to warrant the risk of receiving no interest at all if the index falls over the investment period.
A popular suggestion at the moment is an investment in corporate bonds, which you could do via a Stocks and Shares ISA (where capital gains will be tax-free) or just by buying units in a Unit Trust. A corporate bond is an investment in company debt, whereby you are paid interest on your investment which has a fixed redemption date in the future. This type of investment is seen as a halfway house between the security of cash and the higher risk and potential returns of shares. Corporate bond funds are currently yielding 5% p.a or higher, but this return is not guaranteed and the capital value of your investment can fall.
If you are looking at putting away money for the medium to long term (5 years or more) then it might be worth considering an investment in the stock market. Again, you can do this via a Stocks and Shares ISA, an investment bond or a Unit Trust. By using a fund (rather than just buying shares in one company) you spread the risk over lots of different companies. The UK market has been very turbulent over the last 18 months, and there is no guarantee that prices will not go down even further. However, if you look back at the history of the UK stock market, these things tend to go in cycles and over the long term returns on shares have always outperformed safer cash deposits. At some point in the future, today's share prices are likely to look pretty cheap. The big question is - how far in the future are we talking? Nobody has the answer. What we can be sure of is that it must be a better time to buy shares now than it was 12 months ago - and yet people are terrified to take these risks now whereas 12 months ago the stock market was still buoyant and it seemed like a one-way bet. This is the nature of investment - at the very time when returns could be highest, people's instinct is to stay away. The most successful investors are usually those who take a long term view rather than trying to chase the 'quick buck'.
One way to reduce the risk of a stock market investment is to make regular savings each month rather than lump sums. By doing this, you end up buying your units at an average price so you are less likely to invest at a high point in the market. You should also be aware of how you will be taxed on any gains that you might make - this is something often overlooked by novice investors. You should invest as tax efficiently as possible, using your ISA allowances if possible to maximise your returns.
Call Mulberry Financial if you would like to talk to an adviser about your options.

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The material here is for general information only and is not intended to be relied upon for individual investment decisions. Appropriate independent advice should be obtained before making any such decisions. Mulberry Financial Ltd does not accept any liability for any loss suffered by any user as a result of any such decision.
The information is based on our understanding of current HMRC rules and practices (as at the news article date) which are always subject to change. Taxation and trust advice and Cash ISAs are not regulated by the Financial Conduct Authority. This site is aimed at UK residents only.
Please remember that the prices of shares and other investments can fall sharply. You may not get back the money you originally invested. Past performance is not necessarily a guide to the future.

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