Escape the cash trap
£1.32TRILLION is salted away – earning next to nothing for savers
ANATIONAL obsession with squirreling savings away in secure cash deposits rather than choosing potentially higher-earning alternatives costs households more than £30billion in lost returns last year. Despite earning the lowest interest on savings for 20 years, savers piled into cash at a greater rate than ever in 2017 – with the total balance in deposits reaching a record high of £1.32 trillion.
Analysis by website Steps to Investing suggests savers who put aside in cash the recommended three months of household income as a financial safety net would be far better off investing any surplus in shares.
Had they done this last year rather than leaving money at the mercy of low saving rates they could have collectively earned more than ten times the income – £35billion from share dividends – than the meagre £3.4billion in interest on cash.
Follow our step-by-step guide to beating cash apathy and getting started in equities:
SOME CASH IS GOOD
KEEP enough cash savings for emergencies – three months of household income is the rule of thumb. It also represents the best place to build a pot for shortterm goals such as a deposit on a home. Find the best savings rates at websites such as Moneyfacts or Savings Champion.
DO YOUR RESEARCH
BEFORE investing, do some research. Ben Yearsley, investment expert at Plymouthbased Shore Financial Planning, says: ‘Do not just jump in and buy the first investment you read or hear about. Find investments – shares or funds – you feel comfortable with. Once you have invested do not keep looking and worrying about day-today performance.’
Look at specialist financial publications, newspapers and websites to build financial knowledge, including This Is Money.
EDUCATE YOURSELF
IMPARTIAL websites such as the Money Advice Service are a good place to begin self-teaching. The websites of banks and other financial companies, although not impartial, do offer a wealth of information that can be tapped into, even by those not wishing to buy their products.
For example, Janus Henderson’s Steps To Investing website includes videos aimed at demystifying investment while Santander Bank’s Investment Hub offers educational material about investing.
REDUCE RISK
RATHER than picking individual company shares, consider purchasing collective investments such as funds or investment trusts.
These are run by fund managers who invest in a range of companies. Even if one holding performs badly, others will hopefully perform better, therefore smoothing out overall fund returns.
For information about investment trusts visit the website of The Association of Investment Companies at theaic.co.uk. Fund listings and analysis can be found at Trustnet.
STUDY FUND TYPES
MANY people start investing using ‘tracker’ funds. These are passive funds because they mirror the performance of a specific stock market such as the FTSE All Share Index. They are popular because charges are low. But if stock markets drop, these funds follow them down.
The alternative is an active fund where managers make their own decisions about where to invest. Charges are higher but may be worth paying if the fund performs and beats the index.
DISCOVER WHAT LIES BENEATH
NERVOUS investors often start with a cautious investment fund which will split exposure across equities, property, bonds and cash.
Yearsley says: ‘These funds will not turn you into an investment millionaire but nor will they crash and burn if markets take a turn for the worse.’
Ones to consider include Investec Cautious Managed, Neptune Balanced Fund, Hargreaves Lansdown Multi-Manager Equity and Bond and Baillie Gifford Managed.
INVEST LITTLE AND OFTEN
BEGIN by making regular monthly contributions rather than a single lump sum investment. Starting a long term plan when younger, even with modest amounts – say £50 a month – will allow a pot to grow steadily over the years, relatively pain free.
ASSESS YOUR ATTITUDE TO RISK
FEW people are comfortable with the idea of losing money. But just as powerful is the regret of being too cautious. The best response is to spread money across different investments. Get help with assessing attitude to risk from a qualified financial adviser. Find an adviser at unbiased.org.uk, pfs.org or vouchedfor.co.uk.
BUY SHREWDLY
HOLLY Mackay, of consultancy Boring Money, knows a thing or two about the best ways to buy investments. Among her favourite companies for newbie investors are Wealthify (where you can start investing with just £1), Nutmeg, Hargreaves Lansdown and Vanguard.