We’re not exactly huge fans of Cash ISAs at the Fool. The best you can hope for on instant access is 1.5% a year, and most pay closer to 0.5%, which means your money is falling in value in real terms, after inflation.
Dash for cash
However, we understand why they are popular. Everybody needs a low-risk home for at least some of their money. The problem is, they don’t always get it.
New research from Which? shows that unscrupulous investment companies are targeting savers searching online for Cash ISAs and savings rates, in a bid to flog them something a lot riskier instead.
It has uncovered dubious online marketing practices that deliberately blur the lines between cash savings and riskier investments.
The consumer champion ran a series of online searches for popular savings terms, such as ‘best Cash Isa’, ‘best savings rate’, ‘best Isa rates’ and ‘Cash Isa comparison’, and was shown promotions for products offering high fixed returns, often prominent paid ads on Google.
Double-digit danger
Savers have already lost millions after putting their money into bonds and crowdfunding companies offering returns ranging from 5% to 12% a year.
In January, mini-bond provider London Capital & Finance (LCF) collapsed owing around 12,000 people £236m, with the average loss almost £20,000. LCF was authorised by City watchdog Financial Conduct Authority (FCA), but its products were not. Soon after, unauthorised mini-bond firm Asset Life folded owing £8m to 500 savers. It offered 8.75% a year. As ever, if something sounds too good to be true, it is.
FCA regulated profile peer-to-peer (P2P) platform Lendy, headline sponsor of the Cowes Week sailing regatta, went bust in May after tempting savers with 12%. Around 9,000 customers lost £152m. They might recover 58p in the pound.
None of these are covered under the Financial Services Compensation Scheme, which protects up to £85,000 of ordinary bank savings.
Twisted terms
Now, we are big fans of stocks and shares at the Fool but we also know it is perfectly possible to lose money on them too. I’m currently nursing some pretty hefty losses on Yorkshire-based polyhalite potash mining flop Sirius Minerals, whose share price has plunged from 36p to less than 4p on my watch.
The difference is that most investors really should know the risks when buying individual stocks, and can factor that into their portfolio planning. They can reduce risk by spreading their money across a diverse range of stocks and funds in different sectors and markets, to limit the fallout if one of them does a Sirius, or a Carillion, or a Neil Woodford.
They could further spread risk by only investing money in the stock market that they will not need for at least five years, and ideally several decades. That way your money has much longer to grow, and you can ignore short-term turbulence.
Cash ISAs have a role to play in a balanced portfolio. P2P may also. I reckon stocks and shares should still make up the bulk of it, though. Whatever you are buying, just make sure you understand all the risks.
