Investing without losing sleep

Gareth Shaw / 22 June 2016

With interest rates at rock bottom, savers are looking for a decent return. But how do you minimise the risks of the stock market?



Question

The rate on my savings account has been cut three times in the past 12 months. I know I could get a better return by investing on the stock market, but I’m worried about losing money?

Answer 

In January, the Bank of England reported that the average rate on a standard savings account had fallen to just 0.85% per year – that’s 85p interest for every £100 you save. 

Things aren’t much better in the cash ISA market either: Moneyfacts comparison site says that the average no-notice cash ISA now pays a paltry 1.05% per annum. You may wonder if there’s any point in putting money in a savings account at all.

I can understand apprehension about making the transition from cash to stocks and shares, but cuts to savings rates have had a damaging impact on the income you can generate from your nest-egg. So you’re taking a sensible step by considering a different way to get your money working harder.

Guide to investing for beginners.

Understanding investment risk

People often see cash as a ‘riskless’ investment, in that you can’t lose the sum you’ve invested in a cash deposit account. 

But if you steadfastly stick to cash, you expose yourself to inflation if your savings don’t keep up with the rising price of goods. And with savings rates in such a dire state, you could also end up facing ‘shortfall risk’ – meaning your investments haven’t grown enough to meet your financial goals.

Shortfall risk could, of course, occur when you invest your money on the stock markets, but let’s focus on what you’re worried about: the risk that you could lose the capital you’ve invested, often called ‘capital risk’. 

This is indeed a possibility when you invest your money in company shares, bonds or other types of ‘asset’. Share and bond prices can rise and fall in value, meaning that they may sometimes be worth less than the price you paid for them. But there is a way potentially to mitigate this…

What is investment risk?

The power of diversification

This is the process of not putting all your eggs in one basket – investing in different types of asset that react in opposite ways in the same economic situation, or in sectors that move independently. By diversifying your investments, it means you are spreading the risk.

For example, say you put all your money into shares in one company. If that company’s share price slides, your entire investment is at risk. But spread your investment to include shares of another company in a different business area and it may well be unaffected by the issues facing the first firm – meaning your losses are cushioned.

You can further spread risk by buying different types of asset. 

Bonds – loans to a government or company in exchange for an interest payment – often move in the opposite direction to shares. So, when one part of your investment portfolio is falling, another may rise to offset any losses you make. 

Assets, such as property, tend to move independently of shares and bonds, which can help to spread risk and potentially boost returns.

Diversification should be the best friend of every investor. 

And at Saga Investment Services, we’ve done the hard work for you. Our Ready-made Portfolios are fully diversified investments designed to help you meet your financial goals. There’s a cautious portfolio for those who don’t want to take on too much risk but want the potential of a better return, all the way up to adventurous portfolios for those who want the potential for larger profits and can handle some extra risk.

For more news and useful information, subscribe to our free money newsletter.

Have a question?

If you have any questions about investing your money or need help with your finances in retirement, our friendly team of experts at Saga Investment Services are here to help. You can call them on 0800 033 4000. Our team at Saga Investment Services are experts in investments and financial planning and can answer questions on these subjects only. Gareth cannot reply to individuals personally but will choose questions to respond to on this page.

Want to know more about our Ready-made Portfolios? Visit www.sagainvestments.co.uk/ready to download our free guide.

IMPORTANT INFORMATION Capital at risk. This article is not intended as advice. If you are unsure whether an investment is suitable, please contact an adviser. Ready-made portfolios like ours are offered by many fund managers. You may also hear them referred to as multi-asset funds. The portfolios within our range are called Tilney Bestinvest Multi-asset Portfolios and are administered by Investment Fund Services Limited (IFSL), a subsidiary of Marlborough, one of Europe’s leading financial groups. Funds within each portfolio are chosen and managed by our research team but it is up to you to choose the portfolio that is right for you. Saga Investment Services Limited is a joint venture between Saga and Tilney Bestinvest and is separate from Saga Personal Finance. Saga Investment Services Limited is an Appointed Representative of Bestinvest (Brokers) Limited which is authorised and regulated by the Financial Conduct Authority (Reg. No. 2830297) with registered offices at 6 Chesterfield Gardens, Mayfair, London W1J 5BQ. Saga Investment Services Limited (Reg. No. 09308423) has registered offices at Enbrook Park, Sandgate, Folkestone, Kent CT20 3SE

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.