9th November 2015 by BruceDavis
There are some things that almost all of us want. Sometimes it’s clear to us how to get those things, but with others we aren’t so sure – and that’s no less the case with our financial goals.
Ask anyone in Britain what they want to achieve with their money, and they’re likely to tell you one, two, or all three of the following things:
That was what we found when we commissioned an independent survey of 2,000 UK adults in May 2015. So we know what we want, but unfortunately we don’t seem to know how to get it.
In the same survey, we asked people where they keep their money. The answer?
Cash is still king: 60% have a cash deposit account (savings account with a high street bank, for example) and 56% have cash ISAs.
This is the first way in which we are own our worst enemies for achieving our goals. As I pointed out last week, interest rates on cash ISAs and savings accounts are at historically low levels – and have been for the past few years.
The money in these accounts is often barely keeping up with inflation. Take a cash ISA paying 1.5%. With inflation currently at 1%*, you’re only really earning 0.5% because your money today won’t buy you as much as it did yesterday – it’s worth less. To really grow your capital, you have to be beating inflation by a comfortable margin. At the moment, cash can’t do that.
So how else are we going about meeting our goals? Pensions are another popular option, and one that can work better.
With the FTSE 100 returning 6.1% over the past five years, and many pensions invested in this market and others across the world, it’s a popular choice for a reason – and that’s before we get into the tax benefits of saving into a pension.
So we apparently aren’t scared of stock markets, and we know they can be a sensible way to get what we want, right? Wrong. Outside of pensions, we don’t like stocks and shares.
Less than a quarter of Brits say they have stocks and shares. An even smaller percentage, 16%, have a stocks and shares ISA – despite ISA having the tax advantage.
This is odd, as stocks and shares ISA can be just as flexible as their cash equivalents (indeed, even more so sometimes) and offer better returns – although not guaranteed.
There’s no clear reason why we’re happy for our pension to be invested in stocks and shares, but not much else.
What is clear is that we’re perhaps naively hoping that cash products can give us the growth and retirement we want.
The truth is, a mixture is best for most people. Yes, the stock market carries more risk, but it can offer higher returns. Taking risk has to be a part of our strategy.
That’s not to say, though, that stocks and shares are the only way to achieve decent growth. There’s increasing recognition that, for example, fossil fuel companies may become far less valuable if a strong climate agreement is made in Paris in a few week’s time. That would be likely to affect your pension.
Now, with products such as Debentures and peer-to-peer loans sitting at different points on the risk scale, and giving you more choice and control over your investments, there’s also more chance than ever to build a portfolio of financial products that will help to get you where you want to be. It’s not always easy, but it can be possible to get what you want.
* Core Inflation Rate, reported by the Office for National Statistics, tracks the change in what consumers pay for a basket of goods.