Dismal saving rates: five alternatives to grow your money
If you decide to go down the investing route, remember it always comes with risk. If you’re going it alone, the first thing to decide is how much risk you want to take and over what time frame. The basic rule to follow is that if the level of risk is high there’s a greater potential to make a better return; if risk is low, your return is also expected to be low.
You’ll need to choose your investments carefully and getting the balance between risk and return can take time – it can also be difficult to exclude emotion when making financial decisions. By diversifying your portfolio, this can help control risk because if one of your investments is performing badly, another one could be making up for it.
You’ll need to decide if you want to buy funds or individual shares. Both are available on investment platforms or supermarkets but charging structures vary between platform so you’ll need to check admin fees as well as any costs of buying and selling your investments.
If you decide to invest in funds, you can go down the active or passive route (more on these later).
Most funds are actively managed. They are run by a fund manager who decides which shares or bonds or properties to invest in. By choosing this option, you outsource the big decisions to an expert, but you still have to decide which fund to go for in the first place and with around 2,500 to pick from, it’s not an easy task.
You have to monitor and rebalance your portfolio of shares or funds regularly, especially when your goals or personal circumstances change.
DIY investing is time consuming, but can be rewarding if you have the time and patience to review your investments regularly.
Robo-advice is similar to DIY investing but is an automated way for people to make financial decisions so there’s no face-to-face contact and removes the emotion from investing. Robo-advice works via a series of algorithms, including psychometric risk profiling, and forecasting shows the risk and rewards associated with a particular decision. A report of suggested holdings is then produced for the investor which should mean fewer costly mistakes.
One of the major boons of this is that it works on a basis-point or fixed-fee model, typically less than 1%, which is an “ideal option for first timers and those that just want to press a button and invest,” Richard Theo, CEO and co-founder of Wealthify, an online investment service, says.
Another bonus is that customers can access their plans 24/7 and withdraw money any time they want, and robo-advice is regulated by the Financial Conduct Authority.
However, the risks centre around security and data, particularly how information is stored and protected and what would happen if errors were found in the technology or algorithms.
It also only takes into consideration a small part of your overall finances, so it’s not all encompassing. As an example, you can invest for your pension or for inheritance tax planning purposes, but not both.
See The pros and cons of robo-advice for more.
These are a type of passive vehicle because there is no fund manager at the helm so no active-decision making going on. The funds simply replicate the contents of the index or market being tracked – for example, a FTSE 100 tracker fund replicates the top 100 UK shares.
Trackers are considered a simple and lower cost option for investors. While they don’t require the expense of a fund manager, they take a small percentage of the value of your investment each year, typically around 0.3% – 0.5% annually.
Theo of Wealthify, says: “This is generally a longer-term, steady-growth strategy, with typical returns upwards of 6% per year over the past 20 years in the case of the FTSE 100.”
But trackers can also suffer disproportionately if particular sectors that make up a chunk of the index being followed go through a rough patch. In addition, as there’s no active fund management involved, there’s little manoeuvre room to protect your capital should the market turn.
“These tend to be cheaper but will never outperform the market due to the charges,” says Rob Morgan, pension and investments analyst at Charles Stanley.
Peer to Peer (P2P)
This is sometimes referred to as a hybrid form of saving and investing. Websites like Zopa, Funding Circle and Ratesetter promise up to 7% headline returns – much more than average high street rates – by matching up individuals or companies wanting to borrow money with savers willing to lend it to them. The P2P industry reported a record 2015 with the number of lenders up 22% and borrowers up 96%.
Adding to their appeal, some P2P savings can be held within a new kind of tax-free wrapper called an Innovative Finance ISA (IFISA). From 6 April 2016, the interest and gains from particular P2P loans held in these are eligible for the usual ISA tax advantages.
But one of the major criticisms is that P2P lenders aren’t protected by the Financial Services Compensation Scheme so if anything goes wrong and you lose your money, the government won’t help you.
Theo adds that the returns may also be significantly lower, more like 3% but can be higher if you’re willing to lock your money away for longer periods.
See YourMoney.com’s Peer-to-Peer guide for more.
Another form of mass-market investing and similar to peer-to-peer lending, crowdfunding platforms differ slightly in that they raise funding for a project or venture through lots of smaller contributions from a large number of people.
Investors are usually offered either an equity stake in the company, a fixed rate bond, or even rewards. Investments can range from as little as £10, with no maximum. Rates of return can vary and will ultimately depend on the success of the start-up or project.
There is a high risk the company you invest in will fail so you should only invest if you really believe the product or idea has a future.
Platforms offering the new Innovative Finance ISA allow you to invest in crowdfunding projects tax free, but as with peer-to-peer, investments aren’t protected by the Financial Services Compensation Scheme.
See YourMoney.com’s Equity Crowdfunding guide for more.