Adrian Lowcock of Bestinvest
Millions of people invest their money in a dizzying range of products offered by the financial services industry.
So, when we asked you to "ask the expert" about savings and investments, there were many questions asking for a translation of the best deals on offer.
Last week Adrian Lowcock, of financial advisers Bestinvest,
answered your questions about Individual Savings Accounts
, and this week he is answering your queries about other aspects of saving and investment.
Q1. I have inherited approximately £100,000 in cash and would like to invest in the stock market. What advice would you give in going about who to invest this money with and how?Chris Bleach, Portsmouth.
I would suggest speaking to several companies to get an idea of how much advice would cost and what the different options are. Independent financial advisers, such as Bestinvest, look at the whole market and will recommend a wider range of products, while your bank is more likely to sell you products which are produced by their own company.
Whomever you choose, make sure you are fully aware of the costs involved before committing any money. Many advisers may charge an initial fee or commission which is paid to them by a product provider, but this is not necessary. Also ask how the adviser is remunerated. If they earn commission from the sale, are their interests really aligned with yours?
Q2. Shortly after the banking crisis, I split my savings between different institutions. I have now put most of my money back into a single account to get a better rate and for easy access, even though it is over the compensation limit. Is this wise now the crisis appears to be over? If not, what should I be doing with my savings? David, Worcester
It is understandable that savers are concerned about the safety of their deposits. However, it is important to put it into perspective. No UK saver lost any of their deposits. Those who ended up in the most risky situation were invested in Icelandic banks.
With the banks having gone through the worst of the crisis, the risk of default is receding somewhat, but it does still exist and indeed will always remain. It is unlikely that there will be any default this time, but there could always be another cataclysmic event which means your money is not protected. The decision here is, are you willing to take greater risk for a better return?
You are being paid to hold more than £50,000 in one bank account and sacrificing your protection. If not, then consider moving money across to other banks for peace of mind.
Q3. Can you suggest how savings may be protected against government-inspired inflation? Paul Shakeshaft, Darlington
Our view is that inflation will not be an issue in the short term. However, quantitative easing is not an exact science and if it is overdone, then we may well experience a period of high inflation a few years down the line.
Rising inflation can be protected by investing in index-linked gilts, which are attractive to higher-rate tax payers as the uplift to compensate for inflation is not taxable. Gold is often referred to as an inflation hedge, as the long-term price has stayed the same once inflation is factored in. However, the price of gold has been more volatile in recent years and does not produce an income.
Real assets such as commodities or land are also attractive and hold their value in inflationary times; property produces an income whilst commodity prices will rise with inflation. Some equities will also hold value, particularly those investing in the areas mentioned above and growth companies.
Q4. I have an endowment policy with Standard Life that should end in August 2012. It was originally for a sum of £60,000 but this has shrunk to a payout of between £34,500 and £37,500. It is no longer needed to repay a mortgage and the current surrender value is about £30,000. The monthly premium is £118. Would I be better off surrendering the policy now and invest in something else? John Curtin, Gillingham
Endowment policies have not been a success for most investors and many are in a similar situation. The surrender value is currently about 13% below the lowest encashment value in 2012. That is approximately three years from now and works out at a cost of 4.4% per annum (8.33% on the higher value).
The monthly premium of £118 amounts to £3,894 which you can add onto the encashment. The actual cost of early encashment comes down to very little. If you knew with confidence which figure you were going to get then, the decision would be much easier. However, experience suggests to expect the lowest figure.
The 4.4% would not be too difficult to get in good or even fair market conditions and once you factor in that, you free up. The question to ask yourself is, can you do better elsewhere? You can make your money work harder, use it to top up a pension or take out an Individual Savings Account (Isa), avoiding Market Value Adjustors and retaining the control of your investments.
Q5. Is it better to put money into a fixed term bond and get a bit higher interest rate than keep it in a variable rate account and if so, for how long? Martin Emmerson, Bromley.
Investments can be difficult to judge during economic fluctuations
Fixed-term bonds will give you a better rate and if you can afford to have the money tied up for a while, they are very good places to put cash. The length of time is critical to doing this.
With base rates at close to zero, at some point this will rise.
If you have a bond with too long a timescale on it, then the rate will start to look unattractive relative to what is available at the time.
Currently it is very difficult to predict when rates will rise, with the quantitative easing policy still being applied. I would recommend looking at one or two-year rates. You will benefit from the better returns, but your money will be free before rates have taken off, or at least not too long afterwards. Currently the AA are offering a two-year bond at 4.35%.
Q6. Would you consider it a big mistake to keep money in Premium Bonds? Are there better alternatives that can give you the flexibility to access your savings at short notice? Juan Galindo, York.
Premium Bonds returns are a bit of a lottery. Each month you enter a prize draw and may or may not win something. With the number of prizes having been cut to reflect the low interest rate environment, it is not surprising that the amount you have been winning has come down.
The current yield on Premium Bonds is 1.5% which is tax-free. This can be used for comparison against cash, but it is important to remember Premium Bonds should not be used as a dependable source of income.
Considering you wish to have access to your money, investments might not be appropriate. For short notice, you will need to have an instant access account. West Bromwich Building Society offer 2.85% for an instant access, or if you can tolerate a short-term notice period, Investec High 5 account offers 3.36% with a three-month notice period.
Q7. Please can you advise on where the best places to get information on quality investment products that are geared towards capital growth as opposed to income generation? P Joseph, London
Capital growth investments are not as easy to identify as income investments. For example, corporate bonds have shown a 50% rally since March in capital values, but are traditionally viewed as income investments.
Structured products offer investments that will either be geared to capital or income and usually come with some fixed downside protection. However, because of the low interest rates, there are few products that appeal in the current climate. The first step is to ensure any income-generating assets can be wrapped up in Isas.
That way you avoid paying any tax on the income earned. Corporate Bond funds are best for this as, unlike equity dividends, no tax is deductable at source.
Once you have your income investments in Isas, you could consider zero dividend preference shares for capital gain. This market has been shrinking for many years, but with the introduction of a 50% income tax we have seen some signs of activity in the market.
A zero will repay a set capital sum at a maturity date. For example JZ Capital Partners Zero Dividend Preference Share is 252 and is set to redeem at 369.84p on 22 June 2016. This gives an annualized return of 5.9%. Because it has a set maturity date, you would need to construct a portfolio of these to cover each tax year and diversify risk.
Q8. I have four children aged 13 and under. I am looking for an investment that will help pay for their university costs in five years' time. What sort of investment product should I be looking at for this purpose? Jon Steel, London
If you are not using your Isa allowance you could consider doing so and splitting the money between a cash Isa, currently £3,600 (or £5,100 for those over 50) and the same amount into a stocks and shares Isa.
Because of the timescale before they go to university, a stock market investment would be acceptable. Select a unit trust or several which provide exposure to a wide range of asset classes, countries and give you a lot of diversification, to ensure that the portfolio is well invested from the start.
Q9. With all of the talk of the UK government taking a further stake in RBS group, what does this mean to the normal shareholder? Does there come a point when the taxpayer owns all of the bank that the regular shareholder loses his or her shares? How will the prospect of the UK government selling off parts of the bank affect shareholders? Dan Gray, Newark.
The value of investments can go down as well as up
Ordinary shareholders have been diluted by the government's stake in the bank and will share in less of the growth and dividends than before. The government has done everything to avoid nationalising.
At some point, the government will wish to sell its stake, which may result in a ceiling being put on the share price as the market experiences massive liquidity which will absorb any demand.
Q10. Are ethical funds worth investing in? Will the returns of ethical funds surpass the non-ethical funds in the long-run? Christina Spybey, London
Ethical funds are chosen primarily because investors do not want to be part of certain activities, or at least minimise their exposure. Because ethical investing excludes some sectors, they tend to be less well diversified, which can and does lead to periods of out-performance and under-performance relative to the FTSE All Share.
Currently ethical investing has lagged the markets, because banks tend not to be included and therefore ethical investing has not experienced a large part of the rally.
The decision on whether to invest in green funds or other non-green funds is a personal one. Some investors like to have some ethical exposure, but not their entire portfolio. This way they are contributing to the cause, but not restricting investment performance significantly.
Q11. I have a £20,000 lump sum to invest. Is gold a good option to buy - is there any growth left in this market? Charles Saunders, Marlborough
Much of the recent price movement in gold has been due to the falling value of the US dollar. Many fund managers have held gold in their portfolio recently but primarily as a hedge against market falls and currency movements.
This, in itself, suggests managers are uncertain about the future of equity markets and even gold but would rather have some exposure than none at all.
On that basis, the price could easily continue to rise, but fall rapidly. On that basis, some gold exposure is a good idea as part of a well-diversified portfolio. I would suggest no more than 5%, though.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal 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.