Savers overweight in cash should consider putting the surplus into funds, stocks and bonds.
Are you feeling cash heavy? A bit overweight, as investment managers like to say?
Last year was one of extreme saving for many better-off people. But ultra-low interest rates should prompt savers to look at the alternatives.
Many people, who now feel the need to make their money grow faster or generate more income, are considering funds, stocks and bonds. But as with every major step, you need to have a plan.
For fitness, the NHS Couch to 5K app is good for beginners, with a nine-week programme. I would ease into an investment plan in a similar way, setting sensible goals that will keep you on track.
Has your money been “sitting on the couch”? This is the equivalent of keeping too much in cash at the bank, where it can lose its value to inflation, described as “taxation without legislation” by economist Milton Friedman.
Bank of England data shows that household deposits now stand at £1.6 trillion and grew by a staggering £124 billion between January and November 2020. Most earn very little. A good rule is to limit your cash savings to three to six months’ outgoings, or perhaps a little more given the uncertainty of the pandemic. Once you reach that, it is time to start your Couch to £5K — or perhaps £50K and beyond — investment programme.
Historically, investments in equities and bonds have produced higher returns than cash. According to Morningstar, the data group, over 10 years to December 31 2020, cash produced 6.3% for sterling investors, global equities 193.5% and global bonds 51.3%. Now there is always risk that the value of your investments in stocks and bonds could fall. You must commit to investing for the long term, at least five years, and preferably 10. Pay particular attention to fees, as even small differences can add up to thousands of pounds over 20 or 30 years.
“I always loved running . . . It was something you could do by yourself, and under your own power,” said Jesse Owens, four-time gold medallist in the 1936 Olympic Games. Investing is similarly a solo activity, but there is plenty of guidance available online for those who go it alone. In running, the basic equipment matters, starting with your shoes. A basic foundation of investing is your platform, a website or smartphone app where you can buy and sell investments. Websites such as comparefundplatforms.com can help make comparisons.
Pay particular attention to fees, as even small differences can add up to thousands of pounds over 20 or 30 years. If you are starting with investments of £20,000 or more, you may be better off paying a flat fee that stays the same as your wealth grows, while a percentage fee based on your investments may suit those with smaller amounts.
And don’t forget about tax. Tax wrappers — government tax concessions — give your investments a boost so it’s a bit like running on clouds. Most investors use individual savings accounts (ISAs) and pensions, whether workplace or self-invested personal pension (SIPP).
- Why is tax-free investing so important?
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Noting that Nike Vaporfly trainers have been controversial for giving runners an unfair advantage, it is worth using tax wrappers fully, because a future government may cut the benefits. If you have surplus cash ISAs, consider transferring these to a stocks and shares ISA. Some 35% of transfers into the interactive investor Isa came from cash ISAs in 2020, compared with 25% the year before.
“They say good things take time, that’s why I run slow” is a common running joke. The Couch to 5K app tells you that when learning you need to stop and start, or go slow. Investors who sprint into “hot stocks” in an attempt to make instant gains are most likely to trip. As with fitness training, little and often is fine — many people set up a regular investing plan, where they drip money into investments every month. You benefit from “pound-cost averaging”, where your returns are smoothed out through the market’s highs and lows.
Those who accept that investing is more like a marathon and train for the long term are more likely to get results. The longer you put your money away for the better, as this lowers risk and gives you the benefits of compounding.
Whatever your motivation for “get, set, go”, a key barrier to investing is knowing where to begin — there are so many funds it can be overwhelming. But most platforms offer starter investment ideas — interactive investor’s quick start funds are six low-cost multi-asset funds at different risk levels, taken from the Vanguard LifeStrategy and BMO Sustainable Universal MAP ranges. They are highly diversified, so you spread your investment bets around. Or you may want a multi-asset fund that generates income, such as Fidelity Multi Asset Income fund, which aims to generate a sustainable income by investing in a broad range of assets.
Higher-risk income options with greater exposure to equities include City of London (LSE:CTY) investment trust, which invests mainly in UK equities, with a bias towards multinationals, and Fidelity Global Dividend, which invests in international equities as well as British. Now all you need is an investment podcast to listen to while you run. Beginners could try our How To Invest series, or the newly launched Mind & Money. Whatever you are looking for, we have a big archive to dip into.
Moira O’Neill is head of personal finance at interactive investor, the author of Finance at 40 and a former winner of the Wincott Personal Finance Journalist of the Year. She holds investments in Vanguard LifeStrategy 80% and Vanguard LifeStrategy 100% equity funds, and City of London (LSE:CTY) Investment Trust.
This article was written for the Financial Times and published there on 27 January 2021.
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