Here’s a statistic. Out of UK savers with £5,000 or more, 70% have “never considered” a Stocks and Shares ISA.
This seems crazy to me. These people have a few grand in savings, so chances are they’re smart with their money, and yet if I asked 100 of them, 70 wouldn’t think about the best wealth-building vehicle they have access to.
The stat came from Oxera in a report that dived into the reasons people avoided these ISAs. Strangely, it’s not because they don’t see the advantages. On the contrary, being unaware of the lucrative returns on offer has no link to being reluctant to put money in a Stocks and Shares ISA.
Rather, it’s “because they fear losing their money”. In other words, the risk that their savings could shrink is not worth aiming for the bigger cash returns from stocks and shares.
It’s understandable. It’s true that the stock market goes down and we can never truly escape the chance that a company we invest in will lose our money. So I can hardly blame them for that.
How to not lose money
But what if we could choose an investment strategy designed around not losing money? In other words, choosing a way to invest in a £20,000 Stocks and Shares ISA where the risks are minimised but still getting the higher rate of return we expect from stocks?
Billionaire Warren Buffett recommends this style of investing. His famous golden rule is: “Rule one: never lose money”.
The first step is to think long term. If I watched the stock market over the next week, I could point out tens or even hundreds of stocks that would go down in value. But this isn’t really losing money, it’s just volatility.
Over a longer period, the stock market has an outstanding track record. The same report I mentioned above found the FTSE 100, over a 10-year period, has a 3.58% chance of losing money.
Even if I’d invested in the Footsie on the worst possible day this century – before the crash in 2008 – I’d have recouped all my losses by 2013.
So if I think in periods of 10 years rather than 10 days, I’ve slashed my chances of losing money. But I can further reduce this risk with the stocks that I invest in.
One strategy to avoid losing money is to build a high-yield portfolio (HYP). With a HYP, I’m buying stocks that pay me a share of the profits as an income.
Build passive income
This income generation – which doesn’t rely on prices going up or down – is popular in this country. The FTSE 100 has 25 companies that pay me 5% or more on my investment. The FTSE 250 has 73 companies.
Those payments zip straight into my account like the interest in a savings account. I received one yesterday, incidentally. A steady stream of interest can make this type of portfolio attractive to those looking for stable investments.
Best of all, when I’m happy with my savings, I may wish to withdraw my yield as passive income. I could aim for 5% of whatever I have deposited into my bank account. This extra income stream might not guarantee that I won’t lose money, but it can minimise the chances.