In Depth

How to make the most of your savings

It's time to move from low-interest Isas to more profitable investments.

Personal Savings

Not everyone wants to be adventurous with their savings. Indeed, simply putting your hard-earned money into a cash Isa may seem like the obvious thing to do. But when it comes to money, nothing is certain. Even cash carries its own risks. As we have seen recently, with inflation steadily creeping upwards, even your money can lose value. And even with their tax benefits - no tax on interest payments - most cash Isas are not paying enough interest to stay ahead of the ever encroaching threat of inflation. So what to do? Well, if you can afford to take on some more risk, you might consider putting some of your money into the stock market.

There are no guarantees, but historically there have been periods when shares have outperformed cash quite considerably. Since the turn of the millennium, a cash sum would have grown by an average of 74%. By contrast, a sum invested in UK shares grew by 164.6% and bonds 165.7%*

Even with interest rates potentially on the rise, it could be a while before Isa providers and banks are willing to pay enough to their Isa savers to ensure their pot keeps pace with inflation. Stocks and shares Isas also carry significant tax benefits, with no tax payable on dividends or capital gains. Armed with the right information, investing in stock market funds can be a good way to put your money to work for you.

Capital growth

When you invest in shares, you are buying a slice of ownership in a listed company. These slices of ownership can be bought and sold on a stock exchange, and their value can (and does) fluctuate based on other investors’ perception of how well that company is likely to do.

Although share price fluctuations are unpredictable, with some shares falling in price as company fortunes hit rough patches, over the long term a diverse portfolio of shares tends to increase in value. By buying a fund rather than individual shares, you can, in one fell swoop, purchase a varied selection of shares that have been hand-picked for you by an experienced fund manager.

Dividends

Dividends can be another major benefit of holding shares. Sometimes, listed companies will opt to divide a portion of their profits among their shareholders instead of reinvesting it into the company itself. There are generally two reasons for doing this: either the company wants to attract more shareholders to potentially raise more capital, or the company is large enough, and established enough, to not need to use all of their profits to maintain and grow their businesses.

By taking any dividends you earn and reinvesting them, you can boost the rate of growth of your shares portfolio. And remember, you don’t pay any taxes on shares held within an Isa, so you can maximise that growth year after year.

Bonds

Corporate and government bonds are typically seen as less risky than shares, but more risky than cash. These are effectively agreements for you, the investor, to loan a company or government a certain amount of money, which is repaid to you with an agreed amount on top over a determined period.

UK government bonds, or gilts, are widely viewed as being quite low risk, because of the perceived low probability of the government defaulting on payments.

Private companies generally carry more risk of default, but also tend to pay higher rates to counteract this increased risk. The riskier the company, the more it will have to pay to borrow money - so the higher yield a bond offers, the riskier it probably is.

The portfolio

A fund is more diverse than a single stock, but even so, different funds will carry different levels of risk depending on what they invest in. By striking the right mix of equities, bonds, cash, or other assets, a risk-rated managed fund can provide a one-stop investment shop. And that can be ideal for someone who is considering investing but unsure of where to look or how to pick assets.

Add to that a team of advisers who are standing ready to answer your questions, or adjust your investments, and you are in as safe a pair of hands as you could wish for in the risky but rewarding world of investment.

*Source: Bloomberg, 18 December 2017

Find out more at Charles-stanley.co.uk/personal-portfolio-service

The value of investments can go down as well as up and investors may not get back the amount they originally invested. Charles Stanley & Co. Limited is authorised and regulated by the Financial Conduct Authority and a member of the London Stock Exchange. Registered in England No. 1903304, Registered office: 55 Bishopsgate, London EC2N 3AS.

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