Why standard saving is a zero-sum game: investing made simple
Lee Turay, Senior Trader, Learn to Trade
The uncertainty over Brexit is already weighing on the UK economy. With inflation at three per cent, the squeeze on living standards has intensified, unhelped by weak wage growth. It’s a serious challenge facing households in Britain. Food prices have increased to their highest levels in almost four years and clothing is up by 5.1 per cent. We’ve got to start making our money work harder, but how?
Discussing money is a taboo. Despite its centrality to each of our lives, paradoxically we avoid talking about the specifics of salaries, savings and pensions. The problem starts at school: money literacy and investment options are missing from the curriculum entirely – so unless you have savvy friends and family, understanding what is best to do with your money can be a financial jargon minefield. And, with only one in 10 of 35-54 year-olds confident that their savings will see them through retirement, it’s time we started seriously considering our options.
The question is, where and how do you invest?
Banks spend considerable budget on marketing themselves as the safe, reputable option for saving money. And while this is true, a standard ISA only offers 3 – 4 per cent interest per year, roughly speaking.
Even a stocks and shares ISA that can offer 13-14 per cent per year typically incurs a 6p to every £1 charge. This massively eats away at margins and, when you factor in inflation – currently at its highest level for half a decade – not only is money not growing, it’s actually decreasing in value. It’s no surprise people are choosing to spend rather than save.
So far, not so promising but there are other options out there. Banks, like many institutions, suffer from apathy and that’s why it’s essential savers shop around to see if they’re getting the most competitive return on their cash.
Investing & Trading
Some of these other options include: investing in bonds, putting money into managed funds, and directly trading stocks, shares and commodities. If you’re able to put away savings for three years, a fixed rate bond with NS&I might be worth considering, as it guarantees a 2.2 per cent a year growth bond with no risk but is unfortunately taxable. Premium bonds, while not guaranteed, do offer savers the chance to win tax-free prizes between £25 and £1m.
Directly trading commodities such as gold has paid dividends in the past, but as blockchain technology becomes universal, critics are citing digital currency bitcoin as the next gold. However, savers are warned to tread carefully. There isn’t currently the protection in place if investors were to lose everything – it’s a huge gamble for anyone without a lot of experience and prior research.
As it stands, by far the most lucrative choice – and one that manages the risk – is forex trading, turning over $5.3 trillion annually. Return on investment is typically four per cent per month on average, which equates to roughly a 60 per cent increase on starting balance after one year, completely tax-free.
Starting Portfolio Value £2,000
Portfolio Value after 1 year £3,202.06
Portfolio Value after 2 years £5,126.61
Portfolio Value after 3 years £8,207.87
Portfolio Value after 4 years £13,141.06
Portfolio Value after 5 years £21,039.25
Figure 1 demonstrates what is known as compounding – i.e. generating earnings on previous earnings. Let’s imagine you open a trading account with £2000, this is a breakdown of your portfolio based on a realistic per cent return (four per cent) per month. After five years, that equates to over £21,000 – more than ten times the original investment.
Typically, this line of interest doesn’t play out in full because once it becomes your secondary, or even primary, income, it will be spent on a new car, bills, holidays, etc. However, it gives you a good sense of how profitable forex can be.
In comparison, this is what that same £2,000 investment looks like in the standard savings account many people are currently using at 1.0%:
Starting portfolio value £2,000
Value after 1 year £2,020
Value after 2 years £2,040.20
Value after 3 years £2,060.60
Value after 4 years £2,081.21
Value after 5 years £2,102.02
After five years, it has grown by just over £100. This equates to a 5.101 per cent increase over five years, hugely disproportionate with the soaring cost of living: the price of fish has risen by 9.6 per cent, coffee by 5.1 per cent, and electricity by 9 per cent this year alone.
What are you waiting for?
Though it’s hard to argue with the returns above, there is always risk involved which we, as humans, are inherently opposed to. However, there is never reward without a little risk. Yes, savings, ISAs and even pensions are low-to-no risk, but they offer a very small ROI or, as we’ve pointed out, none at all.
While trading does demand a disciplined mindset, as long as you stick to some simple rules you can largely mitigate risk and start to see consistent returns. That is why Learn To Trade imposes a maximum two per cent investment stake, so that traders can’t lose everything in one fell swoop. But no matter which platform you’re trading on – particularly if you’re a beginner – we strongly recommend putting similar parameters in place.
Remember, money is an important and complex topic – that’s why it’s vital you constantly evaluate all options to ensure you’re making the most of it.
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