Investment choice depends on attitude to risk

There are three investment aims that most people would aspire to: -

1.       Safety.  You want the investment to be as safe as the Bank of England.  Words like "guarantee" feature highly.

2.       Performance.  You want it to grow by at least 20% a year, preferably 100% pa!

3.       Flexibility.  You need to be able to cash it in without penalty at a day's notice.

I think it was Woody Allen who said, "Life’s a bitch and then you die".  Financial products are a bit like that.  You just cannot have everything you want in life and you certainly cannot achieve all three of these aims at once, so compromise is inevitable. 

For example, a Building Society deposit scores highly under security - no one has ever lost a bean in the last 100 years or more from a Building Society deposit and there is even a government sponsored guarantee for 90% of your investment up to a maximum figure. 

However, you certainly won't get a return of 20% per annum. You would be lucky to get a return of just under bank rate and then there is income tax to pay.  4% to 5% pa net might have been just possible in mid 2000 when base rates were around 6%.  Whenever the word “guaranteed” appears in investment literature, the performance will always be lower than normal.

Banks and Building Societies obtain the money they lend to their borrowers from their depositors.  The interest rate paid by borrowers must therefore always exceed the gross return to depositors to cover tax and administration expenses, at least in the long term. So it is obvious that in terms of beating mortgage interest, safe deposit type investments are non-starters – it’s just structurally impossible.

Nevertheless, you would be able to cash in most deposit accounts very quickly, so such deposits are flexible as separate investments. When measuring up a deposit type investment with our three Aims, aims one (Safety) and three (Flexibility) score high but aim two (Performance) scores badly.

Conversely, investing in stocks and shares can provide very high potential performance but not much in the Safety department.  Over a long period of time, a portfolio of shares has not only beaten inflation, but by a good margin.  But, as they say in the advertisements, shares can go up and down and the past is not necessarily a guide to the future.

Property in general, including commercial property such as offices, shops, and warehouses has also proved to be a good investment in the long term and is probably safer than stocks and shares, certainly less turbulent.  However, you can't cash in a house as quickly as a share. You can't cash in a part of a house either.  Consequently, property scores low on Flexibility but it’s not so bad on Performance and less risky than shares in general.

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