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Guide to making the most of your savings
24th July, 2019

Some basic guidelines to help you maximise the potential return from your money.

When you have taken the time and effort to set money aside, you want to be sure those savings are working for you as hard as they can. This guide lays out some of the main points you might want to consider when planning what to do with those savings, and some general rules you might want to follow to keep them on track to meet your goals.

Build a firm base.

A general rule of thumb is that, before you do anything else, you should build up an amount equalling between three and six months’ salary and place it in a deposit account. This should be easily accessible so that you can get hold of what you need, should an emergency arise.

There are two benefits to having an amount set aside in this way. First, you can feel reassured that, should the worst happen – perhaps if you need to undertake significant repairs to your house or car or you lose your job – there is a fund readily available to help you financially whilst you deal with the other issues. Second, this frees you to make the right decisions about any additional savings. If you invest in the stock market, for example, the value of that investment can go down as well as up. It is therefore no place for money that you might need in an emergency. Building funds on deposit means you can then begin to consider longer-term investments without the worry that you might have to take money out of the market at the wrong time. (But more of that later…)

Holding money on deposit does not, however, mean you have to compromise on return. Careful study of the “best buy” lists and interest rate surveys can help you maximise the interest you earn on this money. You can also spread your money between a number of accounts; some on immediate access; some on 30 days’ notice; some perhaps even on 90 days’ notice. Spreading your money between institutions also helps you to make the most of the guaranteed cover provided by the Financial Services Compensation Scheme (FSCS).

Diversity.

If you are averse to the idea of exposing your entire portfolio to the whims of the stock market, you can further cushion your investment by spreading money across different asset classes. There are not only equities to consider; there are also other asset classes such as property, gilts, and corporate bonds. In this way, when equities are suffering, one of your other choices might be doing better and can compensate for some of that loss. Even if they all have a bad day, they will not all perform equally badly.

Buy low, sell high.

This is a basic tenet of investing that is, however, a lot more difficult than it looks. Calling the top or bottom of markets has proved impossible to do with any consistency, even for experts – if it were easy, there would be many more Warren Buffetts around. Therefore, we would not recommend that you try and turn your hand to market timing.

Trying to “buy low and sell high” has been the undoing of many investors over the years, even though some of the cautionary signals are relatively easy to spot. For example, if a lot of people are talking about a sector that has recently increased significantly, and particularly if they are saying you will miss out unless you get in now, then it’s likely that any potential gains are already accounted for in the price. Getting in “now” might make you a little money as the sector peaks, but the downside could be harsh and sudden. As the technology bubble demonstrated very well, you should ignore hype, particularly if all your neighbours, friends and relatives are talking about it as well.

Conversely, if a sector has fallen a long way, it might be time to invest. Hype works just as much on the downside as it does on the upside. Markets are very prone to herd behaviour – the art is to spot it and make sure you do the opposite. Baron Rothschild is believed to have advised investors to buy when there is “blood in the streets” – that is, when everyone is focusing on the downside – and, historically, times of maximum pessimism have been amongst the best times to buy.

Market downturns do not happen without reason, but they usually result in good companies and bad falling together. Nevertheless, if you want to do well, you need to be able to differentiate the good companies from the bad ones – and also be aware that things can get worse before they get better. If you are unsure or inexperienced, opt for a collective investment such as a unit trust or an open-ended investment company (OEIC). In this way, if one chosen company does turn out to be a bad investment, not all your money has to go with it.

Save monthly.

Not all of us have the time to research and monitor markets. However in pursuit of the good and bad times. However, there is a way to benefit from the swings and roundabouts of the stock market without even thinking about it. If you stagger your investment, you benefit from “pound-cost averaging”. This allows you to buy shares over a period of time at a range of different prices as the market moves up and down. A monthly savings plan – particularly within a tax-efficient wrapper like an ISA – is particulary efficient way to do this because it disciplines your budgeting. When prices are high you will buy fewer shares, but when prices are low, you get more units for your money. Your average buying price is therefore likely to be lower in volatile markets and will benefit overall when markets rise again. You don’t have to worry about the right time to invest – or the wrong time, for that matter – and you can continue the good savings habits you created whilst building your deposit account cushion.

Look at the long term.

Many investors focus on investing in equities because, over the long term, they have traditionally outperformed all other asset classes. However, by “long term”, we mean at least five years and preferably longer. The drawback to equities is that, in the short term, stock market investment is a volatile business and you need to be prepared for the value of your investment to fall from time to time. The trick is to remember why you invested and to look beyond any short-term issues towards your longer term goals.

However, there is one final rule which overrides all of these…

Don’t push your luck.

Markets are constantly changing. Therefore, just as you prepare your portfolio at the outset, you also have to plan for your final objective. As your goal date moves closer, you might consider consolidating some of your gains in order to ensure that you can actually carry out your plans. After all, you do not want a sudden market downturn to halve your hard-earned savings in the final six months.

Better, therefore, to consider moving money out of the stock market, bit by bit; you might start two to three years ahead of your goal or, if you are retiring, five or even ten years ahead. Just like monthly savings on the way into the market, gradually moving your money out means the value you will receive will vary as the market moves up and down. However, the price you get will likely be higher than if your entire investment had been hit by a downturn at the last minute. The money you withdraw could then be invested in cash, or perhaps bonds, allowing you to earn interest over the final months or years until you want to access the full amount.

Similarly, during the life of your investment, watch out for market peaks. A good rule of thumb is: if your money doubles, take out half. Switch to cash or put it in a deposit account – then when markets fall, you could buy back into the same investment at a lower price, and benefit a second time as markets recover.

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