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Building a Savings Portfolio
Knowing Your Risk Appetite
Knowing where to put your savings is about understanding your own risk appetite. Risk increases the possible size of your gains but also increases the chance of losses. We cover the main asset classes available to an ISA investor and provide our analysis of how each ISA asset class performs in terms of risk.
CASH
If you’re looking for near zero risk then Cash ISAs are a sure bet with relatively low returns and almost no risk to your hard earned savings as your savings will be held as cash deposits. Your savings may only be at risk if the financial institution with whom you hold your Cash ISA goes bust therefore it is essential to pick an institution with rock solid credit foundations. Cash ISA rates vary between institutions and across holding periods.
Coming soon our pick of the best Cash ISAs:
BONDS
A bond is a debt that is sold off to investors and savers in the form of a loan that pays an annual rate of interest. In effect a bond is an I owe you between the borrower and the party who owns the bond, the investor or saver. Bonds are typically issued by corporate or government bodies and are used to finance projects and operations.
Bonds pay interest regularly, so they can help generate a steady, predictable stream of income from your savings. Not all bonds are the same, corporate bonds are typically riskier than government bonds. Bond funds tend to be well diversified so the returns in the event of a default by one or more of bond issuers will unlikely cause a big upset to expected returns and are less risky than holding stocks and shares and other ISA eligible investments barring cash. When investing your savings into a bond fund doing some homework on how the fund is made up pays dividends.
STOCKS & SHARES
Stocks and shares of a stock are used interchangeably and represent the equity ownership of a corporation divided up into units, with each share forming a percentage of a business. Shares can be issued via a company in any sector with the world’s major indices formed of shares that make up the utilities, oil, mining, pharmaceutical, construction, aerospace, autos and defence to name a few. Stock prices can be volatile and are highly dependent on economic and geo-political forces. Therefore we would recommend a managed well diversified fund over individual stock ownership.
PEER-TO-PEER LENDING
Peer-to-peer lending removes the banking institutions as middlemen and marries people who have cash to lend and who are looking for returns above the regular savings rate, with individuals or companies wanting to borrow.
A credit check is carried our on borrowers and due diligence practices are applied to enable borrowers to be rated according to risk.
Unlike a normal savings account where the Financial Services Compensation Scheme protects the first £85,000 of any money saved per person, per financial institution if that institution went bankrupt, P2P lenders are not covered by the scheme.
P2P lenders all look to mitigate the risks and each lender will apply a unique strategy therefore before investing your savings with a P2P body attain the relevant documentation so you can make your own risk assessment.
ALTERNATIVE
Alternative asset classes tend to deviate from simple stocks, shares and bonds and focus more on leveraged products like derivative contracts (e.g options, exotic contracts, credit default swaps) with multiplier effects. These types of investments can normally be accessed via specialised funds. Alternative investments are high risk investments with high returns if the bets play out and large losses if they don’t. This asset class will not suit a saver but may suit someone looking to make a risky investment and is prepared to risk their capital in the process.
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