The tiny returns on Isas forced one of the fed-up savers to make an investment in the stock market. He is still excited by the returns he gets.
I was never a real investor, being too afraid of risks, I may have only invested through my pension. However, about a year ago, I saw that the returns from Isa were going lower and lower, which made me cautious about my future. I became so fed up with that that I invested everything into shares, being still afraid of the risk.
On the one hand, why would I do anything like this? This is the money I had been earning for so long. On the other hand, I won’t be able to use it in the nearest 20 years until I retire, so why not? If Isa rates will continue being so low, my peaceful retirement may be in danger.
So have my investments thrived, survived or dived during my first 12 months in the stock market?
My stock market debut
I had just over £28,600 to invest, which had been sitting in a Nationwide cash Isa paying just 1.4% interest. This has subsequently fallen to 0.75%.
Since shifting my cash into the stock market, I have earned at least 14 times more than if I had stuck with cash.
My investment is now worth £33,965. That extra £5,365 represents a 19% return, outperforming the FTSE 100 index of Britain’s biggest companies, which is up 15% from September 25 last year — the day I put my money into the stock market.
With my Nationwide cash Isa, I would have earned just £376 interest. Even if the money had been in the highest-paying five-year fixed-rate cash Isa, it would have earned just £730, according to calculations by the advice website Savings Champion.
How did I fare?
I had no previous experience of the stock market, apart from my pension and long-term investments for my children, Isabel, 8, and George, 6. So for a cautious type like me, the past year has been quite a ride on the stock market rollercoaster, driven by uncertainty in China, plunging commodity prices and the fallout from the Brexit vote.
After a good start, the market trended downwards. At February’s low point, my Isa balance had shrunk to less than my starting point. If I had sold then, I would have lost more than £1,000. By March, my money was back to its original total. I had covered the costs of investing, which came to about £200, but no more.
When share prices fell alarmingly on each side of the EU vote on June 23, I refused to log in to my online trading account. With at least 20 years to go before retirement, I gritted my teeth, pinning my hopes on long-term recovery.
Since then, the plunging pound has pushed the London stock market to near record highs, taking my money with it.
Gavin Haynes, managing director at the wealth manager Whitechurch Securities, said: “The need to ride out short-term volatility is the price you pay for a potentially higher rate of return over the medium to long term, compared with cash.
“Invest for the long term, with good fund managers investing in good-quality businesses, and don’t get too obsessed by the level of the market.”
How did I do it?
As a personal finance journalist, I am all too aware that it is possible to lose money on the markets. Investing is suitable only if you can tie up your cash for at least five years, and preferably a lot longer.
As every disclaimer points out, share prices can go down as well as up and past performance is no guarantee of future returns.
I prefer funds with a long track record of successful investing, a long track record with the same highly regarded manager, a long track record of paying rising dividends — oh, and all for a low cost too. And by long, I do not mean a decade or so of hedge fund high jinks or whirling emerging markets.
Luckily for me, the investment trust sector includes not only funds that have weathered financial storms for more than a century, but also 19 funds that have increased their dividend payouts for more than 20 years consecutively. You can find a full list of all the “dividend heroes” on the Association of Investment Companies website (tinyurl.com/dividendheroes).
Investment trusts have been called the City’s best-kept secret, possibly partly because they have never paid commission to financial advisers. They remain the David of the investment industry, compared with the Goliath that is unit trusts: £146bn is held in investment trusts, against £879bn in open-ended funds such as unit trusts, according to Morningstar.
Jim Harrison, director at the chartered financial planner Master Adviser, explained: “The structure of investment trusts allows them to withhold profits in good years to maintain dividends in slimmer years. For the investor, this means the income stream from investment trusts can be significantly smoother.”
Unlike unit trusts, investment trusts are companies listed on the stock market, so you invest by buying their shares.
The value of your stake varies with the share price and is not directly linked to the value of the assets held by the investment trust. This means fund managers can invest for the long term; if people rush to sell their shares the share price may drop but managers are not forced to sell assets.
Tim Cockerill, investment director at the wealth manager Rowan Dartington, also likes investment trusts because they allow borrowing, known as gearing. Borrowing money to invest can increase returns when times are good, although it will increase losses when prices fall.
Which trusts did I choose?
After speaking to my financial adviser, I split my money equally into four investment trusts: three dividend heroes (City of London, Scottish Mortgage and Temple Bar) and Finsbury Growth & Income.
Scottish Mortgage and Temple Bar have paid out rising dividends for more than 30 years, while City of London has an unrivalled record of increasing dividend payments every year for 50 years. All four have managers who have stuck around for at least 15 years.
They also have relatively low charges. City of London, Scottish Mortgage and Temple Bar charge less than 0.5% a year, at 0.42%, 0.45% and 0.49% respectively. Finsbury Growth & Income charges slightly more, at 0.78%. Harrison described charges of less than 0.5% as “very good for an actively managed fund”.
The trusts have different approaches. Harrison described City of London, which
is a UK-focused trust, as “the rock to build your portfolio on”. It concentrates on “reliability and growth” rather than yield.
Nick Train at Finsbury Growth & Income invests in a portfolio of household names, such as Unilever, Diageo and Heineken.
At Temple Bar, which is also in the UK equity income sector, Alastair Mundy searches for out-of-favour, undervalued areas.
Scottish Mortgage is a £4.9bn global investment trust focused more on growth than income. Despite the solidly respectable name, it invests in riskier tech and internet companies.
How have the trusts done?
Returns on shares come from two sources: income and capital growth. Shareholders earn dividends while hoping share prices rise, just as landlords earn income from rent while hoping house prices go up.
After paying nearly £200 in dealing charges and stamp duty, I started with £7,100 in each trust. I bought them using the Alliance Trust Savings platform, which has charged just over £100 since then.
I earned £876 in dividends, a 3% return — good but hardly huge. The dividend heroes may offer rising payouts each year but that does not mean their yields — the dividend expressed as a percentage of share price — are high. So most of the £5,365 I earned came from higher share prices.
As my husband, Josh, 47, a charity fundraiser, pointed out, the growth is all on paper and could vanish if share prices fall. Without selling shares or withdrawing dividends in future, I cannot access any of the growth.
But I will benefit from the wonder of compound interest. I have chosen to reinvest dividends in new shares, rather than banking the cash. Those new shares pay out further dividends, so I can buy yet more stock. If the companies increase their dividend payments, the investments roll up even faster.
While celebrating my 19% market-beating return, it is not realistic to expect anything near this performance over the long term. The harvest may be far less fruitful in other years. But, when the rewards for saving are so miserly, the stock market seems my best long-term bet.
History shows shares are likely to outperform cash savings. Over the past 116 years, they have beaten cash nine times out of 10 in periods of 10 consecutive years, according to the Barclays Equity Gilt Study 2016. Stretch the period to 18 consecutive years and shares come out on top 99% of the time.
Falling rates on cash
Since Bank rate was cut to 0.25% in August, interest on cash savings has fallen even further. The average for an easy-access cash Isa is now a record low of just 0.77%, according to the data firm Moneyfacts.
Even rates on many high-interest current accounts, my choice of home for my emergency cash, are being slashed from their previous highs of up to 5%.
Anna Bowes, director of Savings Champion, said: “At least a cash Isa can provide steady returns and will keep your cash safe.
“It’s shocking so many people feel they need to desert cash Isas for a riskier option.”