Find the right investment for you
Anyone who ever saw an advert for an investment could be forgiven for getting halfway through the small print and deciding to stick with their savings account.
Alternatives such as shares may be on an upward trend, but they are still decidedly volatile. So why would anyone ever leave the relative safety of a savings account?
Savings may seem safe, but over the long term they have some drawbacks. First, over time, there's a real risk that your money will gradually lose value, thanks to the ravages of inflation.
The average savings pot of a basic-rate taxpayer is in effect presently being eroded by 2.62% a year, according to moneyfacts.co.uk.
The comparison website also calculates that with inflation running at 3.2%, a basic-rate taxpayer needs to find an account paying 4% interest, and a higher-rate taxpayer needs to find an account offering 5.33%, to prevent their savings pot being eroded.
These rates are of course a far cry from what's currently available. If you want more money, you'll have to look beyond cash-based accounts.
Secondly, if you amass over £50,000 with any one bank, anything over that amount isn't protected under the Financial Services Compensation Scheme if the bank goes bust. The same applies if you have lots of accounts with different banks that belong to the same group.
To illustrate: if you had £50,000 with Halifax and £10,000 with Lloyds TSB, only the first £50,000 would be protected, as they both belong to Lloyds Banking Group.
Be prepared to lose
There are several non-cash options, but first you need to know what level of risk you are happy with.
Gavin Haynes, managing director of Whitechurch Securities, says: "For many people the most important question to ask is: 'Am I willing to accept short-term losses in the hope of long-term potential returns?'"
"Everyone would like to double their money," Adrian Lowcock, senior investment adviser for Bestinvest, adds, "but not everyone would be comfortable with seeing it halve."
While halving your investment is by no means a common experience, it's certainly within the realm of possibility over the short term, so you need to be comfortable with the level of volatility inherent in your investment.
Lowcock suggests asking yourself: "What would happen if I lost 30%? Would I panic and cash it in? Would I be able to sleep at night?"
While a certain amount of risk is generally advised if you're investing over the longer term, some people simply couldn't live with it. Yet others are sometimes prepared to take on more risk than their situation warrants.
Your answer will in part be shaped by how long you have to invest. "If you're saving for a short-term need, such as a house deposit or to pay for a wedding in a few years, something like equities is not appropriate.
"If the value of the pot takes a serious hit, there's no time to make it up," says Darius McDermott, managing director of Chelsea Financial Services.
"So those investing for less than, say, five years may find more risk unsuitable; but if you're looking for a savings vehicle to supplement your retirement, you have more time and can therefore take a different view. There's time for losses to be recovered and for volatility to smooth out over time."
What's the right investment for me?
Once you've decided to move beyond a savings account, you need to work out where you want to put your money.
This may mean buying a number of shares in different companies. Alternatively, it may mean buying a variety of different kinds of assets such as shares and bonds.
Spreading risk means that if one asset goes down dramatically, it won't take the whole investment down, as other assets will counterbalance it.
You should also be aware of the benefits of drip-feeding your money into your investment on a regular basis. By investing regularly instead of paying one lump sum, you get the benefits of 'pound-cost averaging'.
A US study by fund manager Fidelity into different investment strategies between 2000 and 2004 found that investing monthly produced far better performance than other alternatives.
For example, take a share that costs £1, holds its value for four months, drops to 50p for a month, and then recovers to £1. If you invested £500 in one lump sum, it would still be worth £500.
If you invested £100 a month you would have got 100 shares in months one to four. In month five, however, with the shares at half the price, you would get 200 shares, before getting another 100 in month six. You would then be left with 700 shares worth £700.
"It's frustrating if you invest a lump sum and see it fall immediately. If you invest money regularly, you will invest some when share prices are high and some when they are cheap, which takes market timing out of the equation.
"When prices rise you benefit, and when they fall at least you are getting more for your money," explains Haynes.
For most investors, the idea of this kind of benefit is attractive, but the real advantage of saving every month is much more prosaic. Most people don't necessarily have a lump sum, so this is by far the least painful way of finding the cash.
McDermott says: "It's a great discipline to save money before it goes into your general cashflow and before you have a chance to miss it."
These various strategies help reduce the risk of moving beyond savings accounts and into other assets, but they won't get rid of risk altogether.
However, it's important to remember the potential rewards there are outside of savings accounts and not be put off by all the alarming small print.
Gavin Haynes, managing director of Whitechurch Securities, recommends...
Invesco Managed Distribution. The mixture of equities and bonds provides useful diversification for a first-time investor.
The fund also takes a relatively cautious approach, which may suit someone stepping away from savings accounts for the first time.
Adrian Lowcock, senior investment adviser for Bestinvest, recommends...
Threadneedle Global Select This is a global equities fund, which spreads the risk across the world, and is ideal for those wanting to take a little more risk.
Artemis Income This UK fund aims to eliminate currency risk and focuses on equities paying dividends, which provide an income even through tougher times when the share value is not growing.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).