Here’s a beginners guide to Investment ISAs that’ll help you decide if you should take the plunge.

What exactly is an Investment ISA?
The big benefit of any ISA is that it protects your money from the taxman.

In any standard savings or investment account, you will have to pay tax on any interest you earn or profit you make. This is usually deducted automatically before you receive your gains.

An Investment ISA is essentially a tax free wrapper which can be placed around a variety of different investments to prevent you from having to pay tax.

Essentially money you invest is used, either directly or indirectly, to buy shares in the stock market. The performance of these shares will then determine if you make a profit and if so how much.

Ordinarily you would have to pay income tax on the income you earn from your investments and capital gains tax on the profit you make from selling shares. However, invest through an Investment ISA and you’ll receive any profit untaxed.

You must be at least 18 years of age to open an Investment ISA; however, the age threshold for most Cash ISAs is 16.

ISA Limits

There is a limit to the amount you can save through an ISA each year, the figures below are for the 2011/12 tax year (6th April 2011 – 5th April 2012):

You can save or invest a total of £10,680 in ISAs this tax year
Up to £5,340 of this can be saved in a Cash ISA
Whatever is left of your allowance can be put into an Investment ISA
So if you have put £3,000 into a Cash ISA, you can only invest up to £7,680 in an Investment ISA during the 2011/10 financial year.

What will you have to pay?
Investing in an Investment ISA does come at a price.

Unlike saving into a Cash ISA, if you opt to invest your savings into an Investment ISA you will have to sacrifice some of your capital in fees.

The reason for this is that the administration of Investment ISAs costs more to the providers than a relatively simple Cash ISA.

In most cases you will have to pay an initial deposit fee to cover the cost of buying the shares. This can vary significantly depending on the type of Investment ISA you choose but is usually around 2-5%.

After the deposit fee, you will also have to pay an annual maintenance fee; this is usually around 1-2% and is taken before your profits are paid.

As they can vary from account to account, remember to consider all the fees that you’ll have to pay when you compare Investment ISAs.

Should you invest?
Before looking at how to open an Investment ISA, you should strongly consider whether it would make better sense to put your cash elsewhere, or if you are moving other investments what fees you will have to pay.

Saving for the long term?

Investment ISAs should always be treated as a mid to long term investments and as a result shouldn’t be used in an attempt to make quick gains.

There are two main reasons for this: firstly although your returns through income from shares and profits are likely to be greater than the interest you’d get from cash over the long term, any capital in an investment can go up or down in value.

Secondly the amount you pay in fees for an Investment ISA will usually negate a significant part of your returns for at least a couple of years – although this will vary depending on how much you invest and where.

This is because the most significant expense you have to pay is likely to be the initial deposit fee of around 5% of your capital, followed by annual account fees on top of this.

Happy to take a risk?

All types of investment will leave your money exposed to a certain element of risk.

This means that you could get less money back than you initially invested if your account performs badly – although you can manage this to a certain extent through the type of ISA you choose or what areas of the market you decide to invest in.

Before investing, you should be happy to speculate with any money you put in an Investment ISA and accept that its value could go down as well as up.

Cash available

You shouldn’t invest money that you may need to access in the near future.

It’s usually reccomended that you have at least 3 months pay saved in cash before you consider investing – to prevent you from having to cancel an investment if you are faced with an unexpected bill.

Remember, because an Investment ISA is designed as a long term investment it’s unlikely that you’d be able to get your money out as quickly as from a cash account without losing out.

Ultimately you should only invest money you won’t need to draw on and are happy to speculate with.

Could it be put to better use?

If you have debts then it’s unlikely that choosing to invest will make the most of your money.

Even the best return on investments is unlikely to outweigh the amount of interest you would pay on unsecured borrowing such as a credit card or personal loan.

This means that you are likely to be better off using the money to pay off your debts instead of investing and looking again at investing once you’re debt free.

For more information read our guide: Should I Use my Savings to Pay Off my Debts?.

Self select or investment fund
Once you’ve decided that you want to invest, the next step is to decide how much involvement you want to have.

Investment ISAs tend to fall into two main categories: self select ISAs and investment fund ISAs.

Fund ISAs
Fund ISAs leave the buying and selling of shares to a fund manager, and work by pooling money into one large fund and investing this large amount of money across a number of companies.

This means that you don’t actively buy and sell shares but instead buy units or a share in an investment fund. Your money, along with the hundreds or thousands of other people’s money is then pooled together and used to buy shares in a wide range of companies.

Therefore, in theory at least, you have the clout of a much bigger investor and can reduce your risk by spreading your money across a wide number of markets, sectors and companies.

However, the annual fees for a fund based ISA are usually greater initially than a self select ISA as you are essentially paying the fund manager to manage your investment on your behalf.

That said, if you are a first time investor, or don’t feel confident buying and selling shares then choosing an Investment ISA that operates through a fund may be the most sensible choice.

Self select

The big advantage of a self select ISA is that it allows you to control exactly where you money is invested and the amount of risk you are exposed to.

However, because you essentially take the reins, they do tend to be better suited to people who have some experience in managing investments, perhaps having already having bought and sold shares in the past, and a clear idea which companies they want to invest in, rather than total novices.

If you are considering a self select ISA then you will also have to be willing to monitor your returns and the markets to check how your investments are performing and make any trades if necessary.

This is even more important because as you will only be investing in fewer companies than an investment fund, you will be exposed to a greater level of risk as your money isn’t spread so widely.

Compare ISAs
After deciding the level of involvement you want to have with your investment, you will have to decide exactly which type of ISA you want to opt for.

Choose a fund

If you want to invest through a fund you should compare those on the market to make sure you get the account best suited to your needs.

For help choosing a fund, read our guide: 9 Steps to Finding an Investment Fund That Will Maximise Your Profit

Select a self select

In the same way as comparing the various fund ISAs on offer, if you’ve decided to opt for a self select ISA then you can start to compare the different ISAs on the market.

Check exactly what areas each self select ISA will allow you to invest in; some are restricted to certain market sectors, while others may only allow you to buy shares from UK based or European companies.

You should also check the different fees applied by the various accounts, including deposit fees, trading fees and whether the account also applies a dormancy fee if you are inactive for a certain period of time.

The level of advice and guidance you receive will also vary between self select ISAs, some may recommend investments which you have to approve or reject, while execution only account will literally leave the decision entirely to you.

You can compare of the different self select ISAs using our self select comparison table.

Swapping or transferring ISAs
If you decide that you want to move your Investment ISA at a later date then you can do this. However, you can’t simply close your existing Investment ISA and deposit the money into a new Investment ISA.

In order you ensure that your tax free allowance is transferred with the money, you need to get your investment manager or company to transfer it directly to your new account.

This usually involves completing an ISA transfer form which is then send to the new account provider who makes sure that the money you are transferring doesn’t affect that year’s ISA allowance.

As such, if you are unhappy with your Investment ISA you can look to change your investments or switch to a different provider.

As with Cash ISAs, you can hold more than one Investment ISA but you are only allowed to pay into one each financial year.

You can, if you wish, move money from a Cash ISA to an Investment ISA without losing your tax free benefits, however you can’t transfer money the other way, from and Investment ISA to cash.

Additionally you can in some situations move existing investments within an ISA wrapper, so you get the tax benefits on the existing account, however, whether you are able to do this will depend on the type of investment account you hold.

For more help transferring your Cash ISA read the guide: How to transfer your Cash ISA

Read more

So.. What makes one person’s pitch for finance rock  and another’s roll?

It’s The Fizz.. It’s ‘The Soda in The Campari’

Lenders look for certain information when they consider a Finance Proposition. They remember what to ask for by referring to CAMPARI.

C is for Character and that’s your Character. Just like any partnership; and essentially anyone lending you money is becoming your partner in business. You wouldn’t  think about taking on a partner unless you knew and trusted the person you were going into business with, so why should the lender. That’s why it’s always best to start with a lender who knows you and your business. Failing this, you have to convince the lender that you are trustworthy.

A is for Ability; can you do what you say you can do, can you prove it. It may be that you have Educational Qualifications in your field of expertise or that you have years of experience running a similar business.

M is for  means; God forbid your business plan will fail, but if it does can the lender recover its loan from your assets. Lenders hate risk and conversely love security, be prepared to provide a personal guarantee or use your home as security if there is no security in the business itself.

P is for Purpose; so what’s the money for? If your business needs money to support a sinking ship, then think again. Tighten the sails and stop the leaks first. Lenders like forward thinking businesses, those that are full steam ahead..heading for distant shores..not sinking.

A is for Amount; is the amount you are asking for the right amount to achieve the objectives of your plan. Prove it.

R is for Repayment;  The lenders want to see that you can afford the monthly repayments for the debt. They want to be convinced that your  cash flow forecast is not a work of fiction, rather based on reliable data, such as a full order book or OAP’s banging on the door of your nursing home.

I is for Insurance; The worst case scenario - something might go wrong; your key person might become ill or die, the factory might burn down..not likely but possible. Any self respecting lender would want to know you had considered all eventualities and having the right insurance will cover these bases.

Meeting the Campari criteria requires some tough work ahead and thats before you make the pitch for finance.

The pitch requires the Soda..the Fizz which will sell your plan to the lender.

Can you have a Campari without the Soda.. yes of course but will it hit the spot, I doubt it.

The simple sponge cake was one of the first things I learnt to bake as a child; 4:4:4: and 2 eggs results in a bland and inoffensive cake. Of course the fun was not in the eating but in the mixing, spoon licking and decoration.

Given the choice as adults we wouldn’t touch them with a barge pole, they are pretty tasteless and very fattening.  Strangely though in recent times they they have been adapted by marketing companies as the new wannabe gift,  a symbol of love, the accompaniment for champagne and a delight to the eye. ‘The perfect little treat’!  But Why?

The secret of course is in the presentation, its not the sponge cake we are attracted to but the decoration and sparkles on top, frosty icing, glittering balls, hand-piped messages and decorative cases. Pop 4 in a hand folded box and the deal is nailed. Serve with ice cool champagne for a fiver and we are hooked. Does cupcake and champagne even go together?

Like it or not the cupcake is selling, it’s everywhere.

The relevance to our investment choices is startling, only yesterday I was contacted by a land management company, they were selling plots of green belt land which were without planning permission. It’s a risky propossition with the potential for high return if planning permission is granted at a later stage.

Being a curious sort of person I asked for the brochure. The proposition  the sponge, the brochure and presentation a decorative cupcake. An alluring piece of marketing that made it look like they were selling a to die for product when if fact it was just sponge.

Of course, there is a chance that you could buy a cupcake that actually tastes nice; that after all is the expectation. However, consider the reality. The right ingredients have to be measured, mixed and baked. The cake has to be fresh, soft, light and the flavour superb.

Let’s face it when you have recovered from the appeal of its appearance most cupcakes taste pretty dull and ordinary. Come on its just a sponge.

The fact that pretty ordinary deals are wrapped expertly in glittering packages is a phenomena investors have to think about carefully.

What you should be doing is stripping off the icing and then decide  if you would still buy the cake.

You could argue that the icing adds an intrinsic value to the product which could facilitate an emotional response but, well worth a couple of £’s,  this argument wouldn’t hold much water though if you were shelling out 10′s of £000′s on a piece of land.

The message, beware the marketeer he is a clever and often devious character and is the reason that the following saying was coined.   ‘If it looks too good to be true it probably is’.

Good News

Many Buy to Let investors who have traditionally geared their investments heavily, sometimes at the  80% + LTV level, have been left have been  out in the cold by lenders until now. Today 10th may 2010 has seen the return to market of Mortgages for Investors in The Buy to Let arena,  at the 80% LTV level.

Many Buy to Let Landlords enter the market on fixed deals as this is a way of securing repayments from 2-10 years.  After this period investors revert to the Lender’s Standard Variable Rate (SVR).  The disadvantage of a SVR is that it need bare no relation to the Bank’s Base Rate (BBR); effectively you are at the mercy of Lender’s internal decision making.

While interest rates are low SVR‘s have remained relatively stable however adhoc  interest rate rises are not uncommon.  The latest lender to increase its SVR was Marsden Building Society, which increased its SVR by 0.46% to 5.95% on January 1st this year. According to Moneyfacts, 8 Lenders have increased their SVR while the Bank Base Rate remained at 0.5%.

A prudent Investor would try to fix their rates again as it buys security going forward.  The downside of re-mortgaging  is that it costs a plenty,  costs which should happily and logically be viewed as the risk premium for security.

Post election warning bells are sounding, a hung parliament could be the literal hanging of many investors if they don’t build the security factor into their investment model.

For many Buy to Let Investors the 80% LTV level may not go far enough however, it’s arguably the best news some may get this year.

Castles in The Sky

It was never easy to get a foot on the property ladder, well that’s unless you happen to inherit at the right time, or Mummy and Daddy are pre-disposed to offering the ultimate handout; a generous 10% or (£20,000) of the average house price in Scotland. The present financial climate dictates that repayments will start at about £1000 a month on the remaining £180,000 supported by a joint income if two of you are sharing, of about £50,000. This assumes you have a squeaky clean credit history of course and,you haven’t already been down the raggedy path of bankruptcy.

So that’s the few in the gilded cage sorted out what of the others, the other first time wannabes who are seeing it as it is. Damned near impossible!

There were a frugal few who wisely stashed away money every month saving for the elusive deposit. While their friends partied, holiday’d and adorned in the latest fashions, while they were meanly huddled in the cold watching last years DVDs.  I know a few of those who proudly saved their 10%’s  are now meanly huddled in the cold watching last years DVDs sitting on negative equity.  Is there no justice?

One answer would be to buy with friends, we’ve all seen TV ‘friends’ and wished ‘if only life was like that’; friends, lovers and companions all under one roof, sharing the cooking, cleaning and languishing on charming conversation.  Oh how quickly friendship and love can turn to hate when money and property is involved.  As brilliant as it looks, if you are going to do it cross the legal t’s and dot the bad tempered i’s or you might be looking a future nightmare in the eye.

Ok so what about shared equity;another great idea where you can share with a Housing Association.. form a queue and sadly if you earn over £60,000 a year between you, you will have to take a demotion. Housing Association schemes in and around Edinburgh are few and far between and they are in designated blocks which might not be every bodies bed of roses. Other schemes are emerging where private landlords can take the other equity share and I’m sure this will present other options for First Time Buyer.

‘Paying rent instead of paying a mortgage‘ my dad always used to say’ is a waste of hard earn’ t money’; ‘you are lining the pockets of the  landlords’. I’m guessing I’m not the only one that’s heard that one.  He had a point of course, because it’s the landlords we see 10 years down the line behind the wheel of a flash BMW getting ready to shell out for their son or daughter’ s £20,000 golden handshake.

The key is time.

It’s never been easy to save for a deposit. It’s never easy to go without now, in the hope of some unknown reward somewhere down the line. The younger you are the harder it is to even think beyond next year, never mind in 10 years time.

Analysing the facts today,  property investment in any capacity may seem mad, never mind for the First Time Buyer. History has taught us however, that we have to speculate to accumulate;  and this philosophy is substantiated by statistics and our wealthy landlord. There is no reason to believe that tomorrow’s history will be any different to any other.

Waiting for tomorrow’s history is in essence the First Time Buyer‘s Demise.

It won't happen to Me!

In the UK the probability that we will die before the age of 65 is about 1 in 8 for males and, 1 in 12 for women. The chances that we will die in the next 12 months are as follows:

Age 16-24 1 in 2000
Age 25-34 1 in 1400
Age 35-44 1 in 770
Age 45-54 1 in 294
Age 55-64 1 in 119

Further, what many people don’t realise is that the risk of long term sickness is even greater than the risk of premature death.

Now the really bad bit.

More than 1 in 3 people in the UK will develop Cancer in their lives (Cancer Research UK 2004
Over 250 people aged 26-64 are diagnosed with Cancer every day (Cancer Research UK 2004)
Around 10,000 people below retirement age have a stroke each year (CII UK/Stroke Association 2004)
Over 275,000 people in the UK suffer a heart attack each year (British Heart Foundation 2003)

One of the priorities when considering a new finance arrangement; a home mortgage or business loan for example is what will happen if the person responsible for the loan suddendly dies or becomes ill. Part of the planning process should always address these issues.

On so many levels exposure to the risk of poor Investment can bring even the wisest Investor to their knees.

Offices bursting at the seems with financial analysts lay testament to the fact that constant monitoring cushions Corporate Investors from poorly performing investments; even so, they don’t always get it right.

As a non Corporate investor, you don’t necessarily have the same sort of analytical resource,but that shouldn’t mean you don’t analyse the proposition.

So what do you do?

Many claim they have a gut feeling about their deals feeling confident to rely on fag packet calculations to support their decision making. In a rising market this philosophy may have been supportable, despite it being just a tad unscientific. The credit crunch has brought with it fresh challenges and even if you are happy with the fag packet calcs., the financiers won’t be.

Financial modelling employs a variety of scenarios all of which may or may not happen. It’s a common sense approach to developing decision making tools that anyone can use.

1. Start with research; pick your property, shares or uncut diamonds whatever it is that floats your boat. Determine the value at today’s cost.

2. Consider additional costs; refurbishment costs, development costs, acquisition costs and legal costs, everything you can think of that will make your asset rentable, sellable or storable.

3. Consider ongoing costs; insurance, maintenance & overheads.

4. Then look at the income; it may be dividends, rent or interest.

[ Remember for property always factor in void periods, the shorter the lease the longer the void periods are likely to be. For example it might be prudent to only include 40% of city letting income; where accommodation is let daily, unless you have proof that you can do better than this. For a 6 month shorthold tenancy, assume at least one month a year will be void. With commercial property the lease may be longer but don’t assume you will let straight away especially in today’s market. A prudent investor would establish this type of tenancy before buying the investment.]

That’s the straightforward part ‘Income and Expenditure’ cash flow.

If you can imagine these figures in a spreadsheet you could handsomely demonstrate that your proposal stood a chance of making you money or conversely not; at least in this case it gives you the option to walk away before it’s too late.

Now we have to consider different scenarios.

The easiest to envisage at the moment is an increase in interest rate.

It’s reasonable to assume that interest rates will rise in the next 2 years however, it’s anybody’s guess by how much and when.

It could however, firmly put the scuppers on your plans.

A rise in interest will change the ongoing costs of borrowing. Therefore build in a rate rise of varying degrees and see what happens to your cash flow analysis.

What if a commercial tenant were to exercise a break at year 5 in your plan, how long would you be without rent, what if this scenario coincided with your worst expectation of interest rate rise.

What if a major employer in the city suddenly went bust leaving your buy to let investments unoccupied for long periods, a flood, a fire maybe; the list goes on?

Some of the mentioned events are possible, but unlikely. These types of occurrences can usually be insured against and let’s face it, insurance makes sense; you can’t think of everything.

Whether it’s a £50,000 or £50,000,000 investment, financial modelling will help you demonstrate to lenders that you have considered the possibility of change into the model. If your cash flow remains good despite worst case scenario then it’s a goer.

Once you are happy with a workable budget you can then concentrate on the actual value of your proposition, factoring in growth on the plus side and inflation on the negative you can work this back to a Net Present Value (NPV)

What Does Net Present Value – NPV mean?

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.

NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.

Investopedia goes on to explain that

NPV compares the value of a pound today to the value of that same pound in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.

You might not be able to go all the way with this, but at the very least you should attempt the first part, it’s a common sense fairly straightforward way to assess whether your next big deal really represents ‘Value for Money’.

Those days are gone forever; Innocents are now branded by the Credit Score companies.

Having an Investment aspiration; a new house, Business venture a new job even, is no longer enough. You’ve probably heard it said ‘want something enough..go for it’

NOT SO, nowadays you have to hop the Credit Score hurdle first.

We are no longer judged by what we have done right, rather what we have done wrong or in some case what we have failed to do.

Thinking of yourself as a ‘good credit risk’ with honest knowledge that you have always played by the rules is a mistake. Simply put you are deluded.

If you are applying for a job in Financial Services, a Store or Credit Card, opening a Bank Account or considering a Loan or Mortgage application be warned. Your Credit Score/Report will be accessed as a matter of course. If you don’t make the grade……FACT you will not get that job, credit card, loan, mortgage get the picture. It hurts.

Action Stations

• Get a copy of your Credit Report (and remember its updated regularly so will be out of date within a matter of months).

• Check it for errors. If there are errors and, believe me it’s more common than you might like to think. Work on getting them corrected. It’s not fair I know and, you will have to provide proof which can be a frustrating process. Persevere it will pay dividends in the end.

Remember this document could be and often is the deciding factor that determines what happens next in your life.

So what can you do?

1. If your Credit Report says you are not on the Electoral Role then get on it immediately. Contact the Electoral Office in your area and ask for the application form and/or ask them to send you a letter confirming that you are on the role. It may take time but it’s worth it. You can then get The Credit Report Company to change your file. Lenders always ask how long you have lived at your current address; they prefer permanence it’s understandable. While your application wouldn’t be turned down on the basis of the Electoral Role it’s just one of the factors that can damage your overall Credit Score.

2. Don’t be late with Credit/Store card payments. Set up a monthly Direct Debit to pay off at least the minimum payment every month. If you are late it will be recorded on your Credit Report, while once is acceptable twice is not, it will affect your Credit Score and will trigger an Amber alert on your record, which could then take months to drop off.

3. The same applies if you are late with loan or Mortgage payments; if you think you may be unable to make a repayment on time contact the Lender before the event occurs. They may allow some leeway which will buy you time and save your reputation. (obviously this won’t work if you demonstrate it as a habit) To reiterate, ALWAYS CONTACT THE LENDER. If it was your money you would want to know what was happening.

4. Not having Credit Cards or a history of Credit can be as bad as having too much or paying late. Having Credit Cards and not using them will also do you no service. The best strategy is to have at least one Credit Card in your own name, use it periodically and always pay at least the minimum each month.

5. Do Not apply for Credit until you know you have a ‘Good Credit Score’ (company sites for example Experian or Equifax will explain what this is), every unsuccessful application you make for Credit will effectively reduce your score and compound the possibility of being rejected. Individuals who apply for Credit repeatedly will be considered a poor risk by Lenders as it indicates that other Lenders have rejected them.

Dream of that Investment by all means BUT..

Before you do anything, sort out your Credit Score or be Damned alternatively join thousands of people who are spiralling towards a black hole of rejection.

Like it or not we are stuck with the system.

There are plenty on companies on the web that will take your money for the report, do your research and choose one that gives the service you require.

Good Luck

Uncertainty - Labyrinth Stairs By Rhinaldi

As investors we understand the concept of Risk and Return, the two are inextricably linked; the more Risk we are prepared to take, the greater will be our Return.

Investors’ by their very nature are the Risk Takers.

Lenders on the other hand are Risk Averse. This doesn’t mean to say they avoid Risk altogether; they prefer however, to minimise their Risk, and have strategies in place to make sure the Investor shoulders most of it.

A far cry you might say from the behaviour exhibited by Lenders’ in recent years, leaving them with bucket loads of worthless sub prime investments. Fear not! for Lenders have learnt from their mistakes , mistakes derived from the poorly understood relationship between Uncertainty and Risk.

So, what’s the difference?

Statisticians can calculate the probability of events occurring. They are able to do it because hundreds of thousands of observations have been made over time, recorded and extrapolated. The Stock Exchange is a great example of this happening on a minute by minute basis. Similar facts are collated by the Investment Property Databank (IPD), Meteorologists & Scientists to name but a few groups; and, where data is collated it brings with it predictive power.

We know for example that to toss a fair dice gives us a 1:6 chance of shaking a 6 and consequently we could decide what those odds are worth in terms of Risk and Return.

Uncertainty, on the other hand is represented by ‘the intangibles’; human reaction, freak weather or fraud for example. Unexpected occurrences, create unexpected reaction and, before long have affected the predictions so carefully planned for.

We have seen the effects of such events on many occasions, for example ‘The run on Northern Rock, The Dot Com Bubble & The bombing of the Twin Towers. Heisenberg describes this as ‘the uncertainty principle’.

Normally, we can insure against the Uncertainty of weather, flood, fire & theft however, when it comes to Economic disturbances like sudden fluctuation in Exchange Rates, Interest Rates, Inflation or the availability of Funding it is often too late to save investments from failing.

The press, our vehicle to those ‘in the know’, put out such an array of mixed messages that our logical understanding of the investment market becomes like the stylised illusions of Escher. What we are led to believe; that stairs go up and water flows down, become skewed by visual and audible signals. Even Politicians, Solicitors and Bankers betray our belief systems by becoming ensconced in scandal, deceit and unprofessional conduct.

For many Investors’ it’s too late to reflect, and promise to do better at assessing Risk next time, there simply won’t be a next time. However, for new investors’ let them learn from the lessons of inevitable Uncertainty. Imagine and prepare for the worse and be pleasantly surprised.

How, then does this philosophy relate to the Investment proposition? The answer; Investors’ educate themselves to be more Risk Averse, take on board Less debt, provide adequate reserves as a contingency and above all be honest. Anything’s possible you just have to want it enough.

It's a Gift

Since then two periods have marked the high and low in the history of The Bank of England Interest rate. 1981 marked the all time high at 17% and 2009 the all time low at 0.5%. Both periods signify memorable recessionary eras and yet the interest rates couldn’t be more different.

In 1979, the incoming Conservative government inherited an economy with inflation of 27%. Also many industries were considered inefficient and trades unions were powerful. There had been a winter of discontent; I remember the power cuts, with many strikes taking place in the late 1970s. So it was that Margaret Thatcher used Monetary Policy to restrict spending. Interest rate reached an all time high; savers had never had it so good but, home owners with mortgages and businesses tied in to loans suffered by spiralling repayments. Sound familiar? The government argued at the time that the recession was necessary to shake up the economy and get rid of inefficient firms. It is true that some firms were inefficient but most economists would argue that the recession was deeper than it needed to be. With the rapid appreciation of sterling many good firms also went bankrupt.

Lessons learn’t from this period tell us that Monetary Policy is not a great way to control inflation.

Nowadays the Monetary Policy Committee (MPC) are charged with the task of regulating inflation to 2-3%. Their control of the interest rate to its all time low of 0.5% has been in part an attempt to do this but, its not working yet inflation is too low (1.5% Oct 09). In order for the plan to work the people, businesses and banks must be willing and able to work with and take advantage of the market rates. That’s the bones of the problem; a lack of confidence in the system. The all time low rate of 0.5% is simply not translating into accessible loans which is what’s needed to stimulate the economy.

The attempt in 1981 and 2009 to control the behaviour of providers and consumers by altering policy; interest rate or otherwise, fails to recognise that personal or corporate decision making is based on confidence in the system and application of risk preferences; What’s the point in a low interest rate if liquidity (or willingness to lend) is at an all time low,and media opinion of the future predicts such a range of outcomes.

Interest is only part of the story; a scarce supply of money due to ‘the credit crunch’ has effectively forced up the internal rate of lending and, many companies or homeowners who may have been in the position to borrow no longer have the equity base with which to secure funds.

The interest rate hike of 1981 told us to save, even though many lost jobs, houses, businesses and had nothing to save. The interest rate dive of 2009 tells us to spend and borrow even though many are loosing jobs, houses and businesses & the banks are reluctant to lend at rates that reflect the true rate.

Sounds like different method same outcome.

The evidence that there is confusion in Government, the media and amongst economists is evidenced by Mervyn King who calmly advises that consumers should prepare for an eventual rise in rates. In other words even if you are one of the fortunate who happens to be sitting on a favourable interest rate, don’t get too comfy!