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reminder: saving is different to investing

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Being crammed like sardines in the Tube is not a lot of fun. On the plus side it’s the perfect environment for marketing to ABC1s (sociologist speak for professional and above, similar to American upper middle class and up?) as those people are very likely to be London Underground commuters for at least part of their journeys.

Advertising to well off people is a plus because, it turns out that one of the things that people like to market on the tube are financial services - something that unsurprisingly, I’m interested in. The other day, an advert from Prudential caught my eye. The strapline was something like ‘tired of your savings floating away with taxes?’ and the product being advertised was an ISA, a type of tax-free account.

Now I have a problem with this ad campaign. I’m a big fan of savings and ISAs, and you can get an ISA savings account, it’s called a cash ISA. But this campaign wasn’t for a savings account, it was for the other sort of ISA you can get. One that I’m also a fan of. The Stocks and Shares ISA. Does a Stocks and Shares ISA sound like a savings account to you?

The clue really, is in the name. A stocks and shares ISA is an investment account. It’s not a place for your savings, but for your mid to long term investments - stuff you won’t touch for at least five years gives a good rule of thumb. The man from the Pru is misleading you with his ad campaign.

For me, this leads on to the bigger picture. Too many people don’t realise the difference between savings and investments. This means that they are mis-sold investments without understanding the risks involved (check out endowment policies for example), and lose money that they can ill-afford to. This is the problem that might occur with the Pru ad.

There is an even more insidious risk though with confusing savings and investments. That’s people thinking that they don’t need or want to invest because it’s too risky, and that savings will be enough. Although it’s possible to use savings to generate sufficient return for the long term, it takes a lot more money to do so, and although it’s conceivable that savings could outperform investments, it’s relatively unlikely.

Over the long term, cash is one of the worst performing investments that you can make. Which means that savings accounts are one of the last places you want to put your long term money (one of the few things they beat is ‘under the mattress’). Getting people confident and educated about investing in the UK is already massively hampered by previous investment mis-selling. It doesn’t need to be made worse by investment companies mis-advertising their products.

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17 comments for “reminder: saving is different to investing”

  1. This is very true, I went to get an cash ISA several years ago and the bank person tried to convince me that a stocks and shares ISA was the same thing but with a higher rate of return! I ended up getting both, and it worked out for me but many people (my mum is one) blithely go along with whatever their bank’s tell them.

    Posted by Looby | February 27, 2008, 9:20 pm
  2. Great point, as usual!

    Cash, or cash equivialants should only be used for short time or for “liquid” reasons like a Baby Step #1 Emergency Fund.

    Posted by RacerX | February 27, 2008, 10:08 pm
  3. I was thinking about that just yesterday. Some commercial I saw was advocating getting more for your money by investing in something. It was comparing that to savings account rates. But as you say they’re for different purposes. I’m not going to put my wedding fund (ok, I don’t have one anymore, but still) in stocks because that’s short-term money. Maybe my daughter’s wedding fund. ;) (j/k…all kinds of things wrong with that)

    Posted by Mrs. Micah | February 27, 2008, 10:23 pm
  4. @Looby:
    That’s not good at all, in fact I’m pretty sure it’s against FSA rules to do things like that.

    @Mrs. Micah:
    But you’ve got your sons’ wedding funds sorted out, right? ;)

    Posted by plonkee | February 27, 2008, 10:47 pm
  5. I actually think she didn’t really know herself, she seemed very new, not that that’s an excuse she should know and understand all her products. Ah well, they were my banking nemesis #2, although my ISA is still there (must remember to do something about that when next in the UK, although I’m not sure if I can move my ISA if I’m not currently resident)

    Posted by Looby | February 27, 2008, 11:05 pm
  6. Ooh, I forgot to ask- where you shaken up last night?

    Posted by Looby | February 27, 2008, 11:08 pm
  7. I was woken up by the rattling of the front door, which I thought was someone trying to break in. But of course it wasn’t and I went back to sleep. I didn’t find out it was a quake until later on when I got to work.

    I don’t think that non-residents can move ISAs, as when you open an account you have to confirm that you are resident and ordinarily resident for tax purposes. You are ok to still hold on to your ISA but you definitely can’t contribute.

    Posted by plonkee | February 27, 2008, 11:39 pm
  8. My whole house shook for a few seconds. Long time since I felt that.

    With ISAs you have the cash component, and the stocks component. So many in each although that changes next year. Over the past few years I have tried to fill the Cash ISA up to the max. I know the rate of return isn’t great (around 6%) but I think it is still important to have it. I don’t know an alternative. Whilst it isn’t safe in terms of inflation it is there to get at if I need it (emergency fund) and I don’t see myself not doing that each year. The stocks bit I was slow to get going on. I just have FTSE All Share tracker but it hasn’t been particularly good years recently. Of course I know that long term is the plan but I do find my confidence in it not being so high these days.

    Is your personal feeling that Indexes are ok or are you just following the general feeling that Indexes are a good thing and just keep doing it?

    Posted by Llama for brains | February 28, 2008, 12:01 am
  9. ok Plonkee! I have a question (yeah I know its late for your anniversary and all that but its sort of related to this topic).

    We talk about cash and stocks and shares but given the need to diversify I was wondering about commodities. I should probably somehow invest in property but I’m not a rich guy :(

    How does one invest in commodities? Specifically say gold. Over the past 12 months gold has really gone up (ok so I’m too late but it doesn’t stop the question). How does one invest in that. I know I could go and buy a gold bar. But that is a lot of money. Any ideas?

    Posted by Llama for brains | February 28, 2008, 12:17 am
  10. @Llama for brains:
    I honestly think that indexes are good because I don’t think that I can do better, and I’m pretty certain that I can do worse. Truthfully, I’m of the general opinion that no one can systematically do better than indexes over the long term (especially taking into account fees) - of course some people will do better, but that’s just random chance rather than their actual knowledge. Feel free to disagree.

    I find that the best way to deal with all my investments is to not look at them very often. Once or twice a year is probably sufficient since I don’t have a very complicated plan, or a large portfolio. One of the things to bear in mind is whether you honestly think that in 5, 10, 15 or 20 years the market is going to be lower than it is now. Most people think that house prices will go up, even if they go down in the short term, and they’ll probably be right - the same could be said about broad-based stocks and shares investments, but for some reason it rarely is.

    I’ll look into commodities and get back to you.

    Posted by plonkee | February 28, 2008, 12:44 am
  11. I think you are right about the ISA. Glad you weren’t too disturbed by the quake although I think I’d be more scared at the thought of someone trying to break in than an earthquake!

    Posted by Looby | February 28, 2008, 6:02 am
  12. Llama for Brains, you could invest in futures markets, but I really don’t recommend that. Amateurs get eaten for lunch in the futures markets. (Futures markets are used by the big players in those industries, both the producers and the big consumers, to hedge their own risks. They know more about the industry than you do.)

    The easiest and best way to, say, invest in gold is to invest in the mining companies that mine it. If gold goes up, they’ll do very well. If it goes down, not so well. Same thing with oil - invest in the energy companies. If you do index funds, you probably already are investing in these companies, so what we’re talking about is making them a bigger part of your portfolio by investing a larger amount of money in them. There’s a good chance that you can find various funds like this available where you normally invest (precious metals or energy funds). Keep in mind that this is a gamble. Don’t stake your fortune on gold going up.

    At its peak in 1980, gold was selling at $2145 per ounce in September 2007 dollars. It closed at $974.30 yesterday (in February of 2008 dollars). Gold is an excellent “crisis hedge,” but if you think you need a crisis hedge, you should buy a bar of gold (or some coins) and keep it in a safe deposit box where you can access it easily. If that crisis comes, there’s no guarantee markets will be open and simply owning some futures or stock in mining companies might not do you any good. (Of course, gold also appreciates when people are worried about a crisis, even if it never comes, hence the high price of gold in 1980. I’m not sure it’s a good idea to bet simultaneously that people will be worried about a crisis in the future and that the crisis won’t actually materialize.)

    All in all, I wouldn’t be too fussed about commodities. They have done very well recently, but, if you believe, as I do, that markets are generally efficient (not perfectly efficient, mind), then you can never really predict when they’ll do well, so you’re best off just owning the entire market in an index fund, including those companies that will prosper when commodities do well.

    Posted by Andrew Stevens | March 1, 2008, 4:23 pm
  13. @Andrew Stevens

    Many thanks for your informative reply!

    Posted by Llama for brains | March 1, 2008, 8:28 pm

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