Surplus income - rethinking investing and considering term deposit instead?

southerngirl_2

Hi all,

I posted a thread a few days ago asking for thoughts on how I could make the most of my savings/surplus income (£1500 mth) now my mortgage is paid off. Thank you for the comments given and I take on board advice to avoid high street banks and speak to an IFA.

I firstly plan to buy additional pension and use up my cash isa allowance.

I already had an appt booked with HSBC so went along to see what they had to say about stocks & shares isa. They recommended the 'World Selection - Balanced Portfolio'.

My investment knowledge at the moment is very limited and I wouldn't be capable of managing a product myself. Looking at the key features of this product I found 'How will charges and expenses affect my investment' concerning.

'The effect of charges and expenses on an investment of £470 mth assuming a growth rate of 7% a yr is set out below

At end of yr Investment to date Effect of deductions What you might get back



1 £5,640 £296 £5,550
2 £11,280 £734 £11,400
3 £16,920 £1,330 £17,500
4 £22,560 £2,040 £23,900
5 £28,200 £2,940 £30,700
10 £56,400 £10,800 £70,100

The last line in the table shows that over 10 years the effect of the total charges and expenses could amount to £10,800. Putting it another way, if the growth rate were to be 7.0%, which is in no way guaranteed, this would have the effect of reducing it to 4.3% a year.

I appreciate that the account is managed so there will be charges, that it is a long term investment, there is an element of risk involved and growth fluctuates but looking at the deductions over ten years I definitely feel like I'd be lining someone elses pockets.

The thought of investing this way is leaving me feeling unsettled and I don't like the uncertainty. I'm now considering the following option - are there any flaws in my thinking?

I'm thinking I'd be better off sending my money to my bank in my home country where I can currently put it into term deposit for 6mths earning 4.5% (there's no limit on how much I can put in, interest paid monthly and as I'm non resident for tax purposes would only pay 2% tax on interest earned). I would be keeping sufficient savings in the UK and send a lump sum back every 6mths/yr when the exchange rates are favourable. As long as interest rates remain favourable I plan on leaving this money in the account for 10 years + on rolling term deposit and let the interest compound. Wouldn't this give me similar return to the portfolio above (assuming rates remained the same) without the risk to my capital. Or is my thinking too simplistic?

atush

There are upfront charges (up to 5% of any money you invest) and annual charges in AMC and trail commission.

You are right to be concerned, as HSBC may have chosen funds for you that have high charges of both types (which is one reason we told you to avoid them). But we can't say for sure as you haven't told us what funds were included in that portfolio?

What I can say is, if you like those funds, you can invest in them thru other companies/platforms that will actually refund you part of that 5% intial charge and also refund to you annual trail commisson. So you can have those same investments but under lower charges.

One thing I will say is that over long periods of time 9whihc I assume this is for) even term deposits will not putperform well chosen equities.

But here is the rub- you need to be able to choose investments yourself or use the knowledge of others. And sometimes the knowledge of others comes at a cost (as it does everywhere from the doctor to the lawyer to the teacher and acct).

'I like the idea of WORLD as mentionned as too many choose a ftes100 tracker and that is it. But sometimes there are better growth prospects elsewhere in the worlkd like the USA and Asia. I like the idea of the BALANCE mentionned, as you don't want all your eggs in one basket. But I don't know what investments are in that portfolio. Perhaps you will list them, or better yet google them and see how they have performed and what/where they invest in.

gadgetmind

southerngirl wrote: »

I definitely feel like I'd be lining someone elses pockets.

Yes, the bank's. As a shareholder in HSBC, I should be pleased, but I'm not.

A bank is a terrible place to invest anything, and an ISA in particular.

You can open a stocks and shares ISA online with someone like Hargreaves Lansdown, BestInvest, Alliance Savings Trust, or many more, and decide for yourself where to invest.

Choosing funds might look scary, but HSBC were about to steer you into a single global balanced fund, so it's not hard to find something similar.

Others here tend to rate the like of Jupiter Merlin Balanced Portfolio, and it would be very easy to do much worse. I include investing via HSBC in this "much worse" category!

darkpool

2.7% annual charges !!!!!

ouch!!!! i'd get a few books and read up on investment, you can cut that annual charge right down.

i bet any minute an IFA will pop up and defend the fees. Then in other threads he'll deny investors pay anything like 2.7%.

Rollinghome

southerngirl wrote: »

I'm thinking I'd be better off sending my money to my bank in my home country where I can currently put it into term deposit for 6mths earning 4.5% (there's no limit on how much I can put in, interest paid monthly and as I'm non resident for tax purposes would only pay 2% tax on interest earned).

After a very good run, the FTSE is currently about 8% higher than it was 10 years ago, so returning just under 1% a year. You would also have earned 3-4% in dividends but that could be wiped out by high charges. So a negative return well below inflation.

A short while ago the FTSE was about 33% below the levels of 10 years ago. Had you bought then you'd be doing well now but if you sold then have done very badly. You would expect a "balanced portfolio" with a mix of equities, bonds, etc to be less volatile but for the returns to be appreciably lower.

So yes, you're right to be wary of any assumption for returns of 7% especially after costs. It could happen but no one knows and that's the risk you take. As you've spotted, the biggest problem for private investors is costs and commission payments. Pay too much and the chances of getting a decent return on investments is much reduced. You take the risk and the intermediaries take the profits.

Whenever salesmen and advisers want to compare the return on investments to cash they tend to quote the Barclays Equity Gilt study. That can be usefully misleading as the study makes no allowance for investment costs and the assumed return for cash is very low - they currently assume the return on cash to be that from a Nationwide account paying just 0.1% for the calculations.

So you'll need to do your own calculations but if you can get 4.5% (almost) tax-free that might be hard to resist. Or you might want to spread your bets with a proportion in equities but keeping your costs as low as possible. Never line a salesman's pocket with high fees unless you're very sure of the benefits. Be sure to do some reading on order to understand what you're doing before making any investment as relying on the good nature of advisers and other salesmen can prove expensive.

If you rely on advisers, regardless of whether they claim to be "independent" or not, be sure to see several and compare what they're offering just as you would when buying anything expensive.

southerngirl_2

Thank you all for your replies.

atush wrote: »

You are right to be concerned, as HSBC may have chosen funds for you that have high charges of both types (which is one reason we told you to avoid them). But we can't say for sure as you haven't told us what funds were included in that portfolio?

Do you mean - Global equities, global aggregate bonds, cash, UK equities and UK Gilts? or breaking it down further into the holdings?

I'm the type of person that needs to understand how things work before I get involved. As suggested I need to do some reading and educate myself further. Can anyone recommend any guides/books that would be a good introduction to investing?

gadgetmind

southerngirl wrote: »

I'm the type of person that needs to understand how things work before I get involved. As suggested I need to do some reading and educate myself further. Can anyone recommend any guides/books that would be a good introduction to investing?

My usual recommendation is "Smarter Investing" by Tim Hale, but I think you might also benefit from something a bit more general.

At the very least, Mr Hale should demonstrate why low fees are critical to good returns.

Rollinghome

southerngirl wrote: »

Can anyone recommend any guides/books that would be a good introduction to investing?

A book written for everyone to understand from Which? (Consumer Association) "Which? Save and Invest" by Jonquil Lowe. Good primer. http://www.amazon.co.uk/Save-Invest-Which-Essential-Guides/dp/1844900444/ref=sr_1_6?s=books&ie=UTF8&qid=1331751131&sr=1-6

Slightly more detail, published by FT, "Be your Own Financial Adviser", also by Jonquil Lowe. http://www.amazon.co.uk/Your-Own-Financial-Adviser-Comprehensive/dp/0273727796/ref=sr_1_1?s=books&ie=UTF8&qid=1331751131&sr=1-1

Very comprehensive, also by FT, "Investing", by Prof Glen Arnold. Just about everything you could need. http://www.amazon.co.uk/Financial-Times-Guide-Investing-Definitive/dp/027372374X/ref=ntt_at_ep_dpt_1

Several people also like another FT publication, "Smarter Investing" by Tim Hale. Gives advice on long-term planning with the emphasis on low cost tracker funds. http://www.amazon.co.uk/Smarter-Investing-Simpler-Decisions-Results/dp/0273722077/ref=sr_1_1?s=books&ie=UTF8&qid=1331751240&sr=1-1

More difficult to read but interesting if you're really keen: "The Long and the Short of It - finance and and investment for normally intelligent people" by Prof John Kaye http://www.amazon.co.uk/The-Long-Short-Investment-Intelligent/dp/0954809327/ref=sr_1_1?s=books&ie=UTF8&qid=1331751281&sr=1-1

All totally reliable and from Amazon. Avoid the 'how to make a killing on the stockmarket' stuff.

Whether you DIY or rely on an adviser, it's really important to understand a bit about investment and why advisers may try to sell you one product rather than another. Good luck.

oldvicar

I'm the guy who suggested (on your other thread) to look in to NHS Additional Pension.

I hadn't realised that UK is not your home country, but hopefully you will take that into account.

Put any spare cash you have (e.g. the £1500 pcm you suggested) in to the best easy access building society account you can find. Once you have enough put by for 'emergencies' (maybe less as a proportion of salary for you than the 6 months salary suggested as a rule of thumb elswhere on this forum) then put it in to ISAs and your Additional Pension. The way I see it you could, if you wished, put away all your savings this way over the next 3 to 4 years.

IMHO unless you have a keen desire for investment risk, then for the next few years you don't need to look any further than finding the best deposit and ISA accounts, along with maximising your NHS pension.

I see no reason why you should consider advised investments charging a large commission.

Credit-Crunched

[QUOTE=oldvicar;51794111IMHO_unless_you_have_a_keen_desire_for_investment_risk[/QUOTE]

By investment risk do you mean risk to capital?

By keeping her money in deposit based accounts she is at the mercy of inflation risk and also interest rate risk.

I agree with building up a reserve pot, and paying into a pension, however leaving money for longer term goals in deposit based accounts is criminal at the moment.

Yes the idea put forward seems to have a very high TER and initial / AMC fees, however some basic reading and research shows some very good low cost funds.

OP please do some research and don't listen to the investments are bad brigade!

oldvicar

Credit-Crunched wrote: »

By investment risk do you mean risk to capital?

Yes and no. Yes because there is the risk of the original investment going down as well as up, but also risk of fluctuations in income if there is any yield on the investment.

No, in this case, because calling savings 'capital' tends to aggrandises them too much IMHO.

By keeping her money in deposit based accounts she is at the mercy of inflation risk and also interest rate risk

. There are some (sadly too few) deposit based products with inflation linked returns. From time to time some of them are good enough to eliminate inflation risk.

Interest rate risk: From where we are now the only significant change to interest rates can be up. So on the whole that is Good for deposits, but Bad for investments.

leaving money for longer term goals in deposit based accounts is criminal at the moment

Criminal only if the law requires greed or gambling, but these used to be signs of a flawed character

In an earlier thread, southerngirl was chastised for paying off her mortgage rather than keeping the debt in order to 'invest'. I bet (yes I would have a very small wager / gamble) that southerngirl feels very happy with her choice to be debt free despite being told she was wrong.