How To Shelter From Sliding Shares
If turbulent times on the stock market are troubling you, here's how to weather the storm.
Last week we saw the biggest fall in single day for the FTSE 100 index since the 9/11 terrorist attacks. Although the market soon recovered some of the losses, it's this unpredictability that gets many investors' nerves jangling.
When the stock market gets stormy, investors traditionally retreat into `defensive stocks' - shares which tend to be resilient in a recession. Good defensive stocks include utilities, tobacco, food retailers, pharmaceuticals and oil where demand normally stays strong regardless of economic downturns.
Defensive stocks don't generally fall as far as the market average in the rough times but, equally, they don't tend to rise as much in the good times either. At least that's the theory. And anyway, while the shares may be more stable than most, investing in them is still risky. If you're risk-averse, you could look to safer havens for your money instead.
Despite a recent cut in the base rate, savings rates have remained pretty healthy as banks and building societies need to attract more funds from savers. That's because borrowing from each other through the wholesale money markets remains difficult in the aftermath of the credit crunch. You can use this greater reliance on funding from depositors to your advantage.
If the stock market is just a little too dicey for your liking at the moment here are five risk-free alternatives:
Five Safe Havens For SaversNational Savings & Investments (NS&I)
These products are the ultimate in terms of security because they're backed by the Treasury. Your money is safe -- unless the Government goes bust!
But there's a drawback. Great security doesn't necessarily go hand-in-hand with great rates. Most accounts don't measure up well to the market leaders. That said NS&I Index-Linked Savings Certificates always catch my eye. Firstly, they are guaranteed to keep pace with inflation with an additional extra return of 1.35% AER and secondly, they're tax-free. You'll need to invest for three or five years and the maximum deposit is £15,000 per issue.
NS&I also do a pretty good Cash ISA, but more about that later.
Best Buy Savings Accounts
There's really nothing wrong with a plain, old savings account. OK, so it may not be as racy as the thrills and spills of the stock market but pick the best of the savings bunch and you shouldn't go far wrong.
At the moment, I like ICICI Bank's HiSave Account which pays interest at a rate of 6.41% AER, easily beating the base rate (currently 5.5%). What's more, the rate has a long-term guarantee to be at least 0.3% above the base rate until 31 December 2011 and there's no nasty withdrawal penalty.
If you want to save on a monthly basis you could try a regular savings account which offers even more generous rates. Many of the best buys are loyalty accounts which means you'll need to be an existing customer to be eligible but it may be worth checking out what your own bank has on offer. Failing that the Special Saver Account from Skipton Building Society pays a handsome 7.3% AER (variable) when you put away between £10 and £250 per month for a year.
Fixed Rate Bonds
You can usually find decent rates if you're prepared to tie your cash up plus you'll have the peace of mind that comes with the guaranteed return from a fixed rate bond. Don't forget you won't usually be able to get your hands on your money until the term ends.
At the moment, both Bradford & Bingley and Icesave are offering six-month bonds with rates of 6.81% and 6.76% AER if you have at least £1,000 to invest. Or, alternatively, for the slightly longer-term have a look at the one-year Fixed Rate Bond from Anglo Irish Bank which pays 6.75% AER (minimum investment £500).
Cash ISAs
If you haven't already, you can save up to £3,000 into a Cash ISA by 5th April and a further £3,600 after that date and earn a great, tax-free return. At the moment, Scarborough Building Society tops the best buys with 6.30% AER but you'll need to give 30 day's notice for withdrawals. For instant access try the Icesave Easy Access ISA at 6.10% AER. A host of other companies offer Cash ISAs at 6.05% including the Direct ISA from NS&I.
Guaranteed Equity Bonds (GEBs)
If you want the thrills of stock market investing without the spills then you may be tempted by a guaranteed equity bond. A GEB allows you to benefit from a proportion of the growth in the stock market but fully protects your capital if the market falls.
Sounds great, doesn't it? But beware most GEBs aren't quite as good as they seem. Let's say you buy a five year GEB which is linked to the FTSE 100. For you to make any money the FTSE must be higher at the end of the term than the beginning. If it isn't then you'll still get back your original stake but you'll lose money in real terms because of the effects of inflation (rising prices) over the five-year period.
Even if the FTSE ends up higher your return will often be capped so you won't benefit from all of the growth produced by the index. Worse still, your return won't include any reinvested dividends paid on the underlying shares.
GEBs are pretty complicated products and there's a risk of getting no return at all. I would suggest if it's a safe haven you're after, GEBs probably aren't the answer.
But for those of you who want to spice up your investments by staying in shares, remember you must take a long-term view -- I'm talking at least five to ten years -- and don't let short-term volatility lead to panic selling. It may seem blindingly obvious but when share prices are down you'll only lose out if you bail out. If the thought of stock market investing brings you out in a cold sweat, then there's plenty of ways to make a decent return without taking a gamble at all.
More: Five More Places To Put Your Savings |Foolish Rules For Good Investing |If you fancy taking the plunge into the stock market why not set up a share dealing account through The Motley Fool.