September 28, 2023

My clients ask the best questions...

I had a client text me the other day asking a great question, so good in fact I thought I would share it with you along with my response,

Should I withdraw money from my investment and pay it into a savings account paying circa 5% interest?

When you are caught in a storm it can be difficult to see the wood through the trees, but we do know longer term cash savings do not outperform investment returns or inflation. It’s been a tough 20 months(since January 2022) and I understand the feeling to change course/strategy due to the relatively high interest rates…..I like this quote from Warren Buffet “The stock market is a device for transferring money from the impatient to the patient”.

One of the main reasons for recent negative investment returns have been the fixed interest asset class, these have fallen in value with rising interest rates. If we took January 2022 as a starting point…UK government 10-year gilt was yielding circa 1% the UK government 10-year gilt yield has increased to just over 4%. In simple terms the government gilt paying 1% has fallen in value with new gilts being issued at a higher yield. With the increased yield this asset class is looking more attractive than previously.

It appears we are nearing the peak base rate and with all things being equal once interest rates level out this is likely to be good news for investments as stock market's like stability & certainty although nothing is ever predictable. Going back to my previous point if interest rates were to drop it would potentially make UK government gilts increase in value due to the current yield they are paying.

Taxation is also a consideration if savings are not in an ISA wrapper. In simple terms, basic rate taxpayers have personal savings allowance of £1,000 and higher rate taxpayers have an allowance of £500. Any interest above this the individual will be taxed at their marginal rate.

It is impossible to know where the stock markets will be in say in the next few months as no doubt there will be bumps along the way. That is why personal circumstances are so important as this will dictate your investment time frame and whether you can ride out the storm.

As my clients know I do love a graph…and I hope the two below show the point I am making. Whilst interest rates are higher than they have been for a long while, considerations should still be made to investing.

This first graph shows investment returns compared with inflation (CPI) and cash savings interest rates over the last 2 years whereas the second graph highlights the same but over a 10 year period.

Please note I have used The Adviser Fund Index (AFI) to highlight investment returns rather than the investment solutions I used as whilst my recommended funds have produce a higher return I do not offer one solution and have a variety options depending on clients’ circumstances. AFI is made up of the recommended portfolios of a panel of leading UK financial advisers. Hopefully you can see the point I am trying to make rather than concentrating on the exact investment returns.

Source: Parmenion article 29th August 2023 title ’Fixed interest: Past, present and future’
This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances. The value of investments may go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. An investment in a Stocks &Shares ISA will not provide the same security of capital associated with a Cash ISA. The favourable tax treatment of ISAs may be subject to changes in legislation in the future.

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