Do I need to have investments as well as savings accounts?

Ike1

Hey there-

Do I need to have investments as well as savings accounts?

Thanks to this board, I have identified and opened several savings accounts with high interest rates (6.5% plus). However, each time I go to a bank to open a savings account, I am continually badgered to make investments too. Being very risk-averse, I have always said 'no' to investments. In addition, I understand that the 'risk-free' investment products often end up paying out less than a normal saving account.

Should I be more open-minded to investments?

Ike

cheerfulcat

Ike1 wrote: »

Should I be more open-minded to investments?

IMO, yes. But don't buy the bank's investment products.

mr_fishbulb

Ike1 wrote: »

each time I go to a bank to open a savings account, I am continually badgered to make investments too.

That's what I got when I opened my Halifax Regular Saver.

They asked what I was saving my money for. I told them mostly for a deposit on a house in a few years. They suggested I might want to make some investments through them.

Oh yeah. I really want to do that with short term savings which I may need to access quickly. :rolleyes:

isofa

It depends, if you are total against risk, the savings (high-interest etc), are the best option. However over the long term "investments" should return better profits.

dunstonh

Remember that a savings account isnt risk free either and there are different types of risk. Two types of risk often ignored by individuals are shortfall risk and inflation risk.

1 - Shortfall risk is a common one where people dont put enough aside to reach their goal or take a risk too low that makes it much harder to achieve that goal. i.e. Pension provision on regular contributions and not using equities because you are concerned about current volatility even though you may have 20-30 years to go (and of course current volatility is a good thing for regular contributions on long term contracts).

2 - inflation risk. Savings rates typically just about keep in touch wtih inflation if the interest is compounded. However, if you take the interest to live on then you are suffering with your real value eroding away. For example, £100k in a bank with interest paid out will have the spending power of around £65k in 10 years time. The value of the interest paid out will have dropped as well.

In addition, I understand that the 'risk-free' investment products often end up paying out less than a normal saving account.

There are some investments with capital security and NS&I products which are attractive and have good potential. NS&I index linked certs for example or the Premier GEB earlier this year which was popular on these forums as the potential was very attractive and it had a degree of security (safer versions also exist but the terms were not as good). NU have an RPI inflation proof product and so on so there are options. You wont find them at your bank though.

davidlee

Ike1 wrote: »

Should I be more open-minded to investments?

Yes (if you want more return).

Milarky

dunstonh wrote: »

Remember that a savings account isnt risk free either and there are different types of risk. Two types of risk often ignored by individuals are shortfall risk and inflation risk.

1 - Shortfall risk is a common one where people don't put enough aside to reach their goal or take a risk too low that makes it much harder to achieve that goal. i.e. Pension provision on regular contributions and not using equities because you are concerned about current volatility even though you may have 20-30 years to go (and of course current volatility is a good thing for regular contributions on long term contracts)

Very creative, dunstonh - there's a 'risk' even in avoiding 'risk'!

2 - inflation risk. Savings rates typically just about keep in touch with inflation if the interest is compounded. However, if you take the interest to live on then you are suffering with your real value eroding away. For example, £100k in a bank with interest paid out will have the spending power of around £65k in 10 years time. The value of the interest paid out will have dropped as well.

..also sometimes called 'wealth protection'. Quite why your wealth needs 'protecting' more than you need to eat, I'll never really understand. Why not just set for a 1% nominal increase each year in the value of savings (spending Income-tax-1%?) As long as nominal wealth increases then so does nominal expenditure (assuming constant rates) And at some point there must be 'deculmulation' of wealth anyway even for a well planned investor. Isn't it just as possible to say that 'longfall risk' is another 'risk' you take when you save (with the intention of spending a comfortable later life?)

'money illusion'. There is also 'money illusion' attached to investments. E.g when you buy a house with 50% borrowed money and 50% capital/equity and the house goes up (say) by RPI+2% for 8 years - let's call that +50% - then people sometimes forget to 'deflate' their original equity - which would represent 14% of the total increase and will say 'I made 100 percent' when, in fact, they made more like 72% [Property is a bad example, I know!]

swiss69

Tax rate should also be taken into account. If you are a low or risk averse investor and a non tax payer then you can achieve 7% at the moment without taking risk. Very few no or low risk investments produce returns in excess of this each year.

GillyFlower

May I ask here if anyone can tell me how to find -

(a) A good independant financial advisor.
(b) How are their fees calculated?

Thank You

dunstonh

(a) A good independant financial advisor.

Most are but its no different from finding a good "anyone". Word of mouth being main one. For recommendations, look at the research supplied. It may bore you, it may confuse you but you should be able to look at the evidence and see that effort and reasoning exists. If no research is provided or reasoning given then that is bad sign.

(b) How are their fees calculated?

There is no cartel on charges. Every IFA is free to set their own charges. The FSA say they should be reasonable but in true FSA form, it doesnt say what reasonable is.

Typically you can pay by commission (the old fashioned way), fee by cheque (which can be fixed amount or hourly) or a hybrid option where you agree a fee and the commission is used to pay that with any surplus commission being rebated or used to enhance terms.

Personally, I tend to use the last version most of the time as it avoids VAT, gets tax relief on it (for pensions) and you still factor cost of advice into illustrations (which doesnt happen when paying by cheque).