The mutual advantage
"Stock markets are inherently volatile," says Alan Pearson, an independent financial adviser at ASP Financial Services, a member of the Financial Options network of IFAs. "Equity-backed investments should be viewed for a minimum of five years as historically this would cover any correction in a market."
Equity investment includes all the various forms of pooled investment products such as unit and investment trusts, as well as buying shares directly. However, the more indirect the investment, the greater the dilution of the risk. For example buying 5,000 Marks & Spencer shares may seem to be a good buy if the shares rise in value. But if they fall, maybe because the stores temporarily lose their appeal, then your whole savings pot would be affected.
The risk can be slightly spread by buying two shares, perhaps M&S and BT, so that if one falls, the overall value of your investment is helped by the other's rise. Buying more shares further reduces the risk until eventually you reach the concept of pooled investments such as unit trusts or investment trusts. But even then, investing for just two or three years is too risky and costly, says Mr Pearson. "Pooled funds attract buying costs of around 5 per cent. There has to be adequate time to recover this initial charge as well as to overcome the volatility of these type of investments."
This theory also rules out most personal equity plans as they are in effect simply a wrapper to shelter equity investments from tax demands. What potential short-term investors are left with are the less exciting range of savings products found in the high street. Simon Holt, the managing director of Skipton Financial Services, the independent financial advice arm of the Skipton Building Society, says: "If accessibility to the money is important and the likely savings period is around two years, I would look no further than a building society savings account. A mutual organisation with no shareholder demands to satisfy is likely to have the edge on interest rates compared to their now demutualised competitors and the banks. Also, although certainly not a good reason in isolation, should the chosen society itself demutualise, there is the possibility of a windfall."
A walk down the High Street will reveal a wide range of savings products. If investors can afford to lock their cash away for a certain period, they are likely to find higher rates. But some instant access accounts also look good value, particularly as rates are rising. For instance, Sainsbury's Bank has just increased its Instant Access account rate to 6.5 per cent gross. The account accepts balances from pounds 1, unlike the many building societies. Scared of attracting carpetbaggers who open accounts simply to get potential windfall bonuses, many societies now require minimum investments of as much as pounds 5,000. For sums of that size, savers may be best advised to check on the growing number of postal and telephone accounts.
Beyond the simple savings accounts, there are a range of fixed-rate products. Institutions such as Bristol & West, Coventry building society, Newcastle building society, Norwich & Peterborough building society and the Woolwich all offer fixed rate bonds paying gross returns in the region of 7 per cent for set periods. But the danger with these products is that, in a time of rising interest rates, you end up fixing at too low a rate. On the other hand at least you know how much you will get.
- 1 'Sickening, deluded and unforgivable': Bloody attack brings terror to capital’s streets
- 2 Mothers' diets may harm IQs in two-thirds of babies
- 3 Far-right French historian, 78-year-old Dominique Venner, commits suicide in Notre Dame in protest against gay marriage
- 4 Eyewitness gives extraordinary account of her confrontation with Woolwich attackers
- 5 Woolwich attack: The EDL might have a sinister plan as a soldier is murdered in suspected Islamic terrorist attack
BMF is the UK’s biggest and best loved outdoor fitness classes
Find out what The Independent's resident travel expert has to say about one of the most beautiful small cities in the world
Win anything from gadgets to five-star holidays on our competitions and offers page.
Day In a Page
A modern home of almost 1,000sq ft is close to Stoke Newington's high street. £499,950
A five-bedroom bungalow in Hoveton with riverside garden and mooring dock, £550,000
A refurbished one-bedroom flat with south-facing reception and high ceilings. £579,950
A four-bedroom Grade II-listed house in Nazeing with large gardens. £550,000
A modern four-bedroom house in a converted stable within walking distance to Peckham Rye. £695,000
Three-bedroom house in a quiet residential area within close distance to Battersea Park. £450,000
A three-bedroom cottage within commuting distance of London, Norwich and Cambridge. £250,000
A two-bedroom cottage with a sun room and gardens in South Chard. £350,000.
A three-bedroom semi-detached house with original features including fireplaces and wooden flooring. £399,950
A modern two-bedroom flat split across two floors and close to several public transport links. £595,000
A one-bedroom flat with an open-plan reception/kitchen and private balcony. £315,000.
A bright two-bedroom garden flat between South Acton and Chiswick Park. £499,950.
A listed four-bedroom farmhouse with stables, set in four acres. £500,000.
A three-storey family home with four bedrooms and an extended kitchen/diner. £995,000.
A three-bedroom Hamstone cottage in the rolling Somerset countryside. £430,000.
A luxury one-bedroom apartment on the first floor of a converted Victorian house. £425,000.