Save, make, understand money


‘You have to be rich to invest’ and other investment myths debunked

Joanna Faith
Written By:
Joanna Faith

We separate the lies from the truth.

“You have to be rich to invest”

Investment minimums are where they are for a reason – to encourage everyone to save, not just the wealthy. You can invest as little as £20-£50 a month in a fund and, assuming 5% growth per annum, could amass £20,000 over 20 years. £50 is the equivalent of 11 pints of larger or glasses of wine – or a couple of nights out a week. So a lot more people could afford to invest than think they can now. And if you can increase your savings over time, the rewards are potentially much larger.

“Cash is a safe haven”

The issues in Cyrus reminded us all that only up to a certain amount of cash is protected should a bank fail. While this raid on people’s savings was (hopefully) a one off, cash investors are actually facing a daily raid on their cash savings in the form of inflation.

Many accounts are barely paying the base rate of 0.5% and inflation has been well above 2% for a long time now. It might not sound much, but a 2% difference between your savings rate and inflation like this means £100 is only worth £90 in five years time and only £81 after 10 years. That’s a fall of almost 20%.

“Bonds are safer than equities”

In the majority of cases this statement would be true, however there are times when this is not the case so investors need to be aware of the risks.

For example, in 2008 when markets crashed, some high yield funds were down 40% – as much as some of the worst UK equity funds.

Also, you need to look closely at volatility. According to Juliet Schooling Latter, head of research at Chelsea Financial Services, some strategic bond funds and high yield funds like those of Old Mutual, Premier, Marlborough and Schroder, have a higher volatility then equity income funds like the two big name ones from Invesco Perpetual and the Fidelity funds.

We’ve also had a 30 year bull market in bonds so investors risk assuming the returns they have seen will continue. “They won’t,” says Schooling Latter.

Government bonds or gilts really have asymmetric risk at the moment. They once offered risk-free returns but are now offering return-free risk. A 1% rise in interest rates could lead to as much as 9% loss in capital on a bond. While we don’t think interest rates will rise soon, they will one day.

Tom Stevenson, investment director at Fidelity, says one other thing to remember when assessing the “safety” of bonds is the fact that there are a number of different types. The three principal ones are government bonds, investment grade (the highest quality) corporate bonds and high yield (or junk) corporate bonds. “The prices you pay for these and the returns you can achieve vary according to the perceived risk of holding them. The relative attractiveness of different types of bonds varies considerably over the economy cycle,” he says.

“Investing overseas is only for high risk investors”

A single investment in one overseas company is, arguably, too risky for the average investor. But if you invest in a portfolio of companies via a good fund manager you can benefit from a pick-up in economic and corporate growth abroad – as long as you’re prepared to deal with currency volatility. Investing in the US, for example, can proved exposure to big themes such as shale gas and fracking. The same can be said for emerging markets, where, says Julian Chillingworth, chief investment officer of Rathbones, it is important to have sufficient diversification. “I wouldn’t’ go for a country-specific fund for the average investor, I’d recommend a broad fund,” he says.

It’s also important to fully understand what you’re investing in. “Remember, BRIC funds [which invest in Brazil, Russia, India and China] will be heavily exposed to commodities,” says Chillingworth.

Even investors in UK equities have some overseas exposure as 70% of UK companies earnings come from other countries. You also get more stocks to choose from and more diversification if you invest overseas, not to mention the currency diversification, which is especially important when sterling is weak.

“You haven’t made any money out of equities in the last 10 years”

Equities have had a bad time of things as we’ve seen two huge corrects in the last ten years or so and there has been much talk of the ‘lost decade’. Yes, some funds lost money (25% of those UK equity funds available to UK investors lost money in the noughties) and the FTSE 100 only returned 9%. But most funds delivered around 30% and the best few were well in excess of 100%. Over the last rolling ten years, the best funds (mainly mid-caps) have returned 400%+ and all but one fund have returned more than 45%.