Savings and Investments - Magazine

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08Are you ready to invest?your children or saving for a pension, you run aserious risk of missing your targets.The safe investments you prefer are unlikely todeliver high-enough returns, making your goalsimpossibly expensive. You’re also likely to run intoproblems if you’re investing to provide an income.As you draw off the income, inflation will eat intothe value of your capital and reduce the buyingpower of your income year after year. So be waryof your natural caution and focus on the full rangeof risks, rather than just capital risk, when youwork out your long-term investment strategies.Medium-risk investorThis is the ideal type of investor. You have a goodappreciation of various risks involved in saving andinvesting. Your short-term strategies are sensiblycautious. You can accept a bit of capital risk toimprove your chances of a return that will beatinflation and make your long-term goals affordable.Focus on identifying the savings and investmentsthat will help you put this strategy into practice.Higher-risk investorYou like to spot good chances for profit and thenput your money where your hunch is. That’s fine ifyou’re playing with money you can afford to lose,but you may need to tone down this approach ifyou’re investing for the long term or pursuing abig goal, such as an adequate pension. Thinkabout tailoring the risks to the type of goal andspread your money across a range of investments,so you don’t have all your eggs in one basket.Short-term goalsShares are volatile over short-term periods.If you need to sell shares within the next fewyears or on a specific date, there’s a risk thatyour shares or the whole stock market maybe in a downturn at that time. A stock-marketslump is not a problem if you can ride it outand wait for share prices to bounce back, butit becomes a problem if you have to sell. Forshort-term goals, such as an emergency fundor building a lump sum over five years orless, you generally need to stick to savingson the first rung of the risk ladder (opposite).These are bank/building society accountsand most NS&I products (www.nsandi.com)that are savings with very low capital risk.The five risksWhen you save or invest, you’re exposed to risk.The lower the risk you’re willing to take, the lowerthe return you can expect. There are five keyrisks you will be exposed to.1Capital riskThe risk you’ll lose some of the money youinvested. Also the risk of losing some or all of thegains you have built up so far. The most obviousinvestments that carry capital risk are stocks andshares, where prices can fall as well as rise.2Inflation riskThe risk that your money’s buying power willfall even though you don’t lose any actual pounds.Most bank and building society accounts , andNS&I products, are particularly exposed to this risk.Shortfall risk3 The risk that your savings or investmentswill not grow enough for you to reach a target.Wortha Tip look For more help with saving andinvestment options, Which?members can get more informationfrom the Which? Money Helpline.www.which.co.uk
Are you ready to invest? 09Fixed/variable risk4 The risk if you lock into an investment offeringa fixed return is that you’ll miss out on any betterdeals later on. Equally, the risk if you opt for avariable return is that it will fall below the level youneed. This can be a problem, especially for incomeinvestors.Longevity risk5 The risk that you’ll live longer than yourinvestments last – a risk with pensions and otherstrategies for providing retirement income.The main trade-off between these risks isbetween capital risk, and inflation and shortfallrisk. To reduce inflation and shortfall risk, youneed higher returns. To achieve this, you mustaccept extra capital risk (which may come in theform of exposure to stock market movementsand/or extra charges).Risk ladderThe trade-off is illustrated by the risk ladder(right). The investments towards the bottom ofthe ladder have the lowest capital risk, but arealso likely to offer the lowest returns, makingthem more vulnerable to inflation risk and/orshortfall risk. At the very bottom of the ladder areindex-linked investments, which, as you mightexpect, offer returns that are linked to inflationand so protect you from this risk.But usually the return from such investmentsis relatively low, increasing the shortfall risk.The risk ladderPotentially higher returnsHigh capital riskHigh-risk investments,such as commoditiesand traded optionsIndividual sharesSingle propertyInvestment fund investingin shares or propertyIndividual corporate bondsInvestment fundinvesting in corporatebonds and/or giltsIndividual giltsBank and building societysavings accounts, mostNational Savings &Investments (NS&I) productsLow capital riskLower potential returnsWhat am I saving for?The best investment for you will depend on yourgoals and whether they are short or long-term.Long-term goalsOver the long term, an investment in a broadportfolio of shares tends to increase in value.There are sound economic reasons for this.Companies are a main generator of economicgrowth. The fruits of growth may be shared withemployees through wages and salaries, and withcompany owners through dividends. Investors arethe owners of the companies whose shares theyhold. Share prices tend to reflect investors’ viewsabout the future prospects of companies so, in agrowing economy, share prices tend to rise.
Page 3 and 4: Contents 03Inside04 Making the most
Page 5 and 6: Are you saving enough? 05Interest r
Page 7: FamilyLife insurance is a mustto pr
Page 11 and 12: Getting to grips with investing 11T
Page 13 and 14: Understanding your options 13is a p
Page 15 and 16: Understanding your options 15Types
Page 17 and 18: The stock market 17What if my broke
Page 19 and 20: Return from property 19When it come
Page 21 and 22: Good financial advice 21How to find
Page 23: Jargon buster 23Mid price The point

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