plonkee money an english-er's thoughts on personal finance

February 19, 2009

the magic money cupboard

Filed under: investment — Tags: , — plonkee @ 8:24 pm

One of my friends is an actuary with an insurance company. His favourite concept is that of the magic money cupboard. He reckons that when it really gets down to it, a surprisingly large number of people (who should know better) believe that when you take out an investment policy, the insurance company puts it into a magic money cupboard, and after a few years, it comes out much bigger.

As my friend quite rightly points out, there is no magic money cupboard. If you save or invest money with any company, they can only put the money in the same places that everyone else does – broadly speaking into bonds, shares, cash, property or commodities.

When you take out a pension, or an investment policy, or anything like that, you are really investing in bonds, shares and cash (and occasionally property or commodities). The value of bonds and shares can and will go up and down, and cash is at risk from inflation. If the whole stock market is doing badly, then it doesn’t matter who your investment is with, if there’s any component invested in shares that bit will be doing badly too.

People that look after the money you invest are clever, have passed lots of exams, and are genuinely trying to get the best return for your money. However, they don’t work miracles, and they aren’t likely to do much better than average because they have to work from the same information that everyone else does.

There’s no such thing as a risk-free investment, and nothing is immune from the major ups and downs of the markets. Understanding and accepting an appropriate level of risk are much better for you than mistakenly believing that the insurance policy you’ve taken out will make money come rain or shine because then, you’re taking on risk that you don’t even know about.

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