Is your money more at risk in a savings account or the stock market?
Written by Lynda Calver on May 29, 2018.
The risks of the stock market are pointed out loud and clear to potential investors. Regulatory guidelines in the UK are super strict, which is why financial firms always publish those foreboding warnings about how the value of your investment can go down as well as up, and you can get back less than you originally invested.
I’m certainly not trying to argue that the stock market does not carry risk. Here at Infinity we take our responsibilities very seriously and always discuss in detail our clients’ tolerance to risk in order to match their investments to their risk profile. Any serious financial planner should be doing the same (if yours isn’t then it may be time to switch). But should savings accounts come with a warning too?
Savings accounts are a risk-free option, I hear many of you cry. Well, yes and no. It is true that money in UK bank accounts does have guaranteed protection under the Financial Services Compensation Scheme up to the current limit of £85,000 per saver per institution (in Hong Kong this is $500,000HKD per saver per institution) which means that if the bank goes bust you will get your money back, but there is still a big risk to savers and that comes from low interest rates combined with rising inflation. To put it simply, if your savings are earning a rate of interest which is below the rate of inflation it is losing value and your spending power is diminishing.
To put this in context, current inflation rates are around 2.5%, which is higher than the Bank of England’s target of 2% because of the fall in the pound due to the Brexit vote. I just did a quick Money Supermarket interest rate comparison and the very best rate I found was 2.7%, on a fixed rate bond account with strict conditions for deposits and withdrawals. Most of the big name bank and building society easy access accounts offer under 1%, which means that the vast majority of savers are losing money. Does that include you?
In a report released last year called ‘Saving Better’, British thinktank The Social Market Foundation has attempted to put a figure on the lost earnings of risk-averse savers. It makes very interesting reading with its claim that by sticking to the perceived safety of savings accounts rather than investing in shares, British savers have missed out on a mind-boggling £90bn over five years.
The report points out that government policy regarding ISAs encourages poor saving behaviour and even suggests that teenagers should be encouraged to invest with a gift of £1,500 at the age of 15 which must be invested in non-cash assets!
I’m not sure on the wisdom of handing those sorts of sums over to adolescents but it is clear that the cash bias is damaging to the savings of many people who may believe that they are being sensible with their money. It is hard enough to save for a comfortable retirement in these turbulent times when many of us are responsible for our own pensions without losing money on your savings.
The reality is that there are millions of cautious investors out there who are simply trying to make their retirement savings work as hard as they possibly can. My clients come from a wide range of backgrounds with differing income levels and I have helped each of them find a savings solution which is right for them and which beats the banks.
If you’d like some advice on how to get the best out of your retirement savings while keeping risk at a level which is tolerable for you I’d be happy to oblige! Feel free to drop me a line at firstname.lastname@example.org and we can discuss how to manage your savings.