Investing for Dummies – UK. Levene Tony

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fail? Yes, especially over the short term, by which I mean up to two or so years. In the great global financial crisis, almost everything went down. You couldn’t just move from one thing to another because whatever you switched to was equally under pressure. No single investment theory works all the time. The best I can do is to point you to those that have a good chance of working most of the time.

       You can’t go wrong with cash

      Having cash under the mattress can be very comforting when everything is going wrong in your life. But keeping cash under the mattress, or anywhere else at home, isn’t a good idea from a security point of view. Nor does it make sense for investors. Putting your cash in a bank protects it from thieves, fire risks, and perhaps the temptation to grab it and spend it in a shop.

      

You never earn much money just leaving your cash in the bank. Most bank account money is in current or cheque book accounts, which often pay just 0.1 per cent, an interest rate that, transformed into pounds and pence, gives you the princely sum of £1 for each £1,000 you have in the bank for a full year. And if you’re a taxpayer, that £1 may be worth as little as 55p after HM Revenue & Customs take their slice. Ouch!

      Better ways of investing the cash that you don’t want today are available, including building society deposit accounts, online cash accounts, telephone banks and postal accounts. With all these options, you can get a higher interest rate but you have to give up flexible access to your cash in return. And you won’t make much. Since interest rates hit their lowest ever in March 2009, savers have struggled to get anything much, losing out to rising prices. But the situation won’t always be like that.

      

The longer you’re prepared to tie up your money, the better the rate of interest you receive. You can lock into fixed rates so you know exactly where you stand, but you must be prepared to hand over your money for a set period, usually one to three years, and throw away the money box key. Granted, some fixed-rate deals let you have your money back early, but only if you pay a big penalty.

      Whatever you earn is cut back by income tax on the interest unless you’re a low earner or use an Individual Savings Account (or ISA). But does this matter? No. The best you can really hope for from a cash account is that the interest equals the rate of inflation – that’s the amount the price of things the average person buys goes up each year – after the tax charge on the annual interest uplift. If inflation is 4 per cent, then a 20 per cent taxpayer needs a 5 per cent headline rate to keep up with price rises – work it out and see! Suppose, for example, your savings account of £1,000 earns £50 interest, or 5 per cent, in a year. Take off the basic rate of tax (20p in every pound) and you end up with the £40, or 4 per cent, you need just to keep up with the rate of inflation. If you’re well off enough to pay tax at the top 45 per cent then you probably work for a bank and pull in big bonuses!

      

The whole point of cash investing is to use it when you’re uncertain or everything in your life looks awful. It’s a security blanket you can retire to during periods when all else is confusion or contraction.

      Don’t disrespect this fact. Keeping a firm hold on what you have isn’t just for fast-falling markets. It’s a vital concept in the months ahead of retirement or any other time when you know you’ll want cash and not risks. You lock in the gains made in the past and can go ahead and plan that big trip, your child’s wedding or the boat you want to buy. Cash is what you can spend, and expenditure is the endgame of investment.

       Property is usually a solid foundation

      The property you live in is probably your biggest financial project – assuming that you don’t rent it from someone. Typical three-bedroom semis now change hands at £500,000 or more in many parts of the UK. And at the higher end of the market, no one blinks an eye any more at £2 million homes (not that most of us can afford one).

      But is property an investment? Yes, because you have to plan the money to pay for its purchase, buying can help you spend less than renting and because you can make or lose a lot of money in property.

      Property beyond your home can also be a worthwhile investment. Stock market managers run big funds like property because it rarely loses value over longer periods, often gains more than inflation and provides a rental income as well. Commercial property, such as office blocks, shopping centres, business parks, hotels and factories, is usually rented out on terms ensuring not only that the rent comes in each month (unless the tenant actually goes bust) but also that the rent goes up (and never down) after each five years, when the amount is renegotiated.

      

Bricks and mortar are as solid an investment as you can find outside of cash, as long as the bricks and mortar are real. A fair number of property schemes take money from you for buildings that only exist on the architect’s plan. This is known as off-plan purchasing. In many cases, these buildings eventually go up, although you may sometimes struggle to find a mortgage lender or a tenant – or both. Some don’t, however, and these cases leave you nursing a loss as the developers and their agents gallop off into the sunset with your cash. This bad buy-to-let industry reputation puts off many mortgage lenders even where the building is finished to specification. Additionally, problems with loans can make tenants wary – they know they can be evicted if landlords don’t have satisfactory financial arrangements.

      Besides building up value in your own home, you have three main routes to investing in property:

      ✔ Buy to let. You become a landlord by purchasing a property that you rent to others.

      ✔ Buy into a property fund run by a professional fund manager. You can do so through personal pension plans, some insurance-backed savings plans and a handful of specialist unit trusts. These nearly always invest in commercial property although some now specialise in student accommodation.

      ✔ Buy shares in property companies. This is the riskiest method but the only one that can provide above-average gains.

      

Every week I get emails offering me ‘guaranteed returns’ from property or forests or farmland in some distant country. In many cases, the returns are promised over ten years and are truly enormous. I always delete these as trash. A ‘guarantee’ is only worth as much as the organisation backing it. And I don’t reckon too much on the chances of an offshore company being around in a few years’ time, let alone paying me what it promised.

       Bonds are others’ borrowings

      A stock-market-quoted bond is basically an IOU issued by governments or companies. Loads of other sorts of bonds exist, including Premium Bonds, which give you the chance to win £1 million each month at no risk, other than losing out on interest. But here we’re talking bonds from governments and big companies, which go up and down on stock exchanges.

      Bond issuers promise to pay a fixed income on stated dates and to repay the amount on the bond certificate in full on a fixed day in the future. In other words, you pay the government, say, £100, and the Treasury promises to give you £5 a year for the next five years and

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