Saving and Investments

Savings and Investments Advice

First things first

Savings and investing can be complex when you get into the detail but, if you start with the premise that all the old sayings still hold true, you won’t go far wrong.

"Don’t put all your eggs in one basket". Or as financial advisers would have it, make sure you have a diversified portfolio ! Some cash, some fixed interest, some property, some UK equities, some global equities, and so on.

"Always look a gift horse in the mouth", If it looks too good to be true it probably is. To paraphrase Gordon Gecko, "Greed is not good".

"Keep something for a rainy day", No matter how attractive the investment proposition always ensure that you have enough in reserve.

Due to the many different types of savings and investment products it makes most sense seek advice in this area, more than any other, particularly as you should be creating a portfolio of products that matches your own needs, aims and circumstances, also taking into account your appetite for risk. Here are a few of the key products:

National Savings Products

National Savings and Investments (NS&I) provides savings products and investments issued on behalf of the government. As a result, any money you invest is as secure as it an be. There are many different types of product, some are for people looking for income, while others provide growth.

All NS&I products are 'deposit-based' which means you can get back at least the money you paid in, and you will get back more if you leave it there and let the interest grow. This makes them a good home for savings you don't want to take risks with.

It's a good idea to compare NS&I with similar deposit-based products from banks and building societies before deciding where to save. NS&I investment returns are rarely spectacular and usually involve tying your money up for a period of time, they are low risk and sometimes tax-free.

Individual Savings Accounts (ISAs)

By using an ISA you can invest in cash or stocks and shares and not pay tax on most of the income and growth generated.The current ISA rules are:

The annual investment allowance is £7,200, of which £3,600 can be saved in a cash ISA.
From 6 October 2009 the annual investment for people over 50 will rise to £10,200 (of which £5,100 can be saved in cash).
From 6 April 2010 the annual investment will rise to £10,200 (of which £5,100 can be saved in cash) for everyone.
You can invest in two separate ISAs each tax year – a cash ISA or a stocks and shares ISA.
You can transfer money saved in a cash ISA to a stocks and shares ISA – but you can't transfer money the other way.

It is a competitieve market but watch out for extreme headline rates, which often have strings attached, Sometimes the higher rate may only be for a fixed period of time, after which the interest rate drops to a less competitive level.

Equities

You can buy equities as part of a pooled (collective) investment or directly, when you buy through the stockmarket. Equities are also known as shares or stocks. When you buy shares direct in a company, you are buying a part of that company, and become a shareholder, which usually gives you the right to vote on certain issues.

The aim of buying shares, of course, is for the value of your shares to grow over time as the value of the company increases in line with its profitability and growth. In addition, you may also receive a dividend, this is an income paid out of the company’s profits. Longer-established companies usually pay dividends, whilst growing companies tend to pay lower, or no, dividends.

The level of a stockmarket goes up or down as the prices of the shares that make up that market go up or down. The main factor determining the price of a share is the perception of its current value rather than its actual value. That perception is frequently based on predictions about the economic conditions in which a company is operating, rather than how it is actually operating.

Shares are generally the most volatile of the four main asset classes. However, risk and reward tend to go hand in hand and, n the long run, the hope is that these investments would provide better returns than the other asset classes. If you are investing in shares you should expect the value of your investment to go down as well as up, on a daily basis and you should be sure you are comfortable with this.Holding shares is high risk. If you have put all your money into one company and that company becomes insolvent then you will probably lose most, if not all, of your money. However, if you have a wide range of shares, you reduce the likelihood of that happening. It is important to stress that you need to be looking to the long term when investing in shares – at least five years or longer. Shares are risky in the short and medium term but if you hold your shares for over, say, ten years, then the risk of you ending up with less than you started decreases, so long as you have a good spread of shares. Most investors invest in shares via Collectives.

Collectives

A collective investment is one where lots of people put in different amounts of money into a fund, which is then invested in one or more asset classes by a fund manager. They are sometimes called pooled investments. The main benefits of pooled investments are:

Professional expertise – an investment expert picks investments for you, watches them daily and judges when to buy and sell them.
Spreading your risk – even if you have small amounts to invest, you can spread your money across a wide range of investments. You reduce the impact on your investment if, say, one company performs badly. Pooled investments will invest in one or more asset class.
Reduced dealing costs – if you want to buy a range of different investments directly, you would probably only be able to invest a small sum in each. This means dealing costs could eat into your profits significantly. By pooling your money, you make savings because of bulk buying.
Less administration – the fund manager handles the buying, selling and collecting of dividends and income for you. They also deal with foreign stock exchanges and brokers, which can be tricky and time consuming.
Choice – there is a very wide choice of funds so that you can pick one – or many – that suit you individually.

There are several types of pooled investment but the main three are: Open-ended investment funds (OEICS or Unit Trusts), Life or Pension investment funds, and Investment Trusts.

Armed with these explanations of the types of financial instruments there are to choose from, you should now seek advice as to which combination best suit your situation and attitude to risk. And don’t forget all the old sayings at the top of the page!

More Information on Risk and Reward