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Personal Finance - Making the most of your savings

There are many ways to invest your savings, but some are riskier than others, says Phil Mileham.

(Photograph: Elly Walton)
(Photograph: Elly Walton)

All GPs have hopes and aspirations in life but it often costs money to turn these into a reality. Whether it is taking early retirement to pursue other interests or putting children through a university education, you often need to plan ahead to achieve your goals.

So it is important to make your money work for you and to take a structured approach to savings.

Apart from considering how much money to put away, there are two key questions to answer:

  • What level of risk do I want to take with my money?
  • For how long do I want to lock my money away?

More reward for higher risk
History has shown that the more risk you take and the longer the period you invest for, the greater, on average, the level of reward.

Investing in shares has generally produced the best long-term results but with volatility along the way. The Barclays Capital Equity Gilt Study 2011 (www.barcap.com/egs) shows that, over a 10-year period, there is a 92% probability of shares outperforming cash deposits and an 81 per cent probability of them outperforming 'gilts' (UK government bonds). However, past performance is not a guarantee of future performance.

If you are saving for a short-term goal, such as a new car, you are likely to want to keep your money somewhere fairly safe, such as a deposit/savings account. However, if you are looking at long-term aspirations, then perhaps you can afford to take on more risk, as you have time to weather the ups and downs of the stock market.

Where to save
Once you have identified your investment aims and the level of risk you are willing to take, there are a number of investment types to consider:

  • Cash.
  • Shares.
  • Fixed interest investments.
  • Property.

Putting your money into a bank or building society account is one of the safest ways to save. However, with interest rates at a record low, not only are you earning less interest on your money but rising inflation can erode the value of your savings and reduce their buying power.

While it is sensible to have an emergency cash fund for unexpected expenditure, you should review your savings regularly and avoid letting large sums build up in your current account.

You could consider building up a varied savings portfolio including share-based investments (such as unit trust funds) to secure better returns over the long term.

Owning shares in a company means that you own part of it and receive part of its profits through dividends. This can be a risky but rewarding business. While share prices are ultimately driven by a company's potential profitability, we have also seen recently how stock market anxiety can send share prices falling.

Rather than buying individual company shares, a less risky way might be to invest in a fund (a unit trust, for example) where your money is pooled with that of other investors.

A fund manager invests the fund in a number of carefully selected companies, thereby reducing risk as your money is spread across a diversified portfolio. There are a large number of funds to choose from. Some are more suitable for low-risk investors and others, for high-risk.

You could also consider 'with profits' funds, where your money is pooled with other investors' and put into a range of asset classes.

Some of the underlying investment returns are held back in years of growth so that the fund has the potential to pay out even when markets have performed badly. This is known as smoothing.

Any surplus returns are paid out as a final bonus when the investment is cashed in. With profits funds have had a bad press in recent years, but they are not all the same - look for a provider that has good financial strength.

Fixed interest investments - some are also known as bonds - are generally considered less risky than shares. Bonds are issued by governments and companies to raise new capital for public investment or to expand a business, for example. They pay interest for a fixed period after which the capital you invested is repaid to you.

Government bonds
UK government bonds are often referred to as gilts - short for 'gilt-edged stocks' - and they are generally a more secure investment than companies' corporate bonds as there is less risk that the government will default on your investment.

Property has historically been a popular form of investment as the value of bricks and mortar has tended to go up over time. Existing investors should now be benefitting from lower interest rates on mortgages and those who invest for rental returns, rather than capital growth, may be tempted by falls in property prices.

However, the recent slump in the market shows that property investing offers no guaranteed returns and it should also be viewed as a long-term investment.

Spread the risk
The returns from shares, bonds, property and cash are only loosely linked. Each can perform differently over the same time period and market conditions. So distributing your investments over a number of different asset types will help minimise your exposure to the risk of losing money.

Particularly for GPs new to investing, it is sensible to take advice from a financial adviser who can help you to make the right choices for you.

Some investments, such as ISAs, venture capital trusts and National Savings and Investments products, come with tax breaks.

However you should not invest simply to get tax relief: where it is best to put your money will depend on your goals and circumstances.

  • Phil Mileham is national sales manager for Wesleyan Medical Sickness, www.wesleyan.co.uk

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