News Archive - May 2013
Is it worth the risk?
18/5/2013
If I am talking to a client about a stockmarket-linked investment like a Stocks & Shares ISA, I am often asked what rate of return it will provide.
This is not an easy question to answer, because their returns are not fixed. A Cash ISA or cash savings account will usually have a fixed rate of interest which will be paid for a set amount of time. A Stocks & Shares ISA will be invested in assets which can go up or down in value so their returns from year to year can never be guaranteed.
At the present time it is very difficult for a cash saver to get an interest rate better than 3% per annum gross. This means that a basic rate taxpayer investing £20,000 now would be able to guarantee that in 5 years, its value would be around £22,517 assuming no withdrawals. 3% per annum is lower than the current rate of RPI inflation, which means that the real value (buying power) of your savings would have fallen over that 5 year period if inflation remains at its current level.
The average UK equity fund has returned 6.6% per annum average growth over the last 5 years (source - Money Management May 2013). This 6.6% p.a figure does not include charges - but even if we include set-up costs and management charges the return would be over 5% per annum. If this was invested in a Stocks & Shares ISA there would be no tax to pay on any gains.
Also remember that the last 5 year period includes the latter part of 2008 and the beginning of 2009 when the FTSE100 fell from over 6000 to a low point of under 4000. It therefore includes a fair amount of fluctuation, so I don't think an average 5% p.a is an unreasonable expectation for future returns.
5% compounded over 5 years on a £20,000 investment would give a fund value of £25,525. So using these assumptions, you would be £3,000 better off, which is not an inconsiderable sum.
Ideally your stock market linked investment would be held for a longer period (unless you had something better to do with the money) - which should lead to an even bigger outperformance over a cash deposit. If we project the same growth rates forward over 10 years then the totals would be £25,353 for the cash saver and £32,577 for the UK equity investor.
The usual risk warnings apply - future performance is not guaranteed. But with cash rates so low, why not look elsewhere for some of your long-term savings? Mulberry Financial can pick the funds for you.
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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