Friday, 29 March 2013

Don’t put ALL your eggs in ONE basket

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During the recent, and ongoing, CYPRUS BAILOUT, I was moved by the reaction of an elderly lady in Nicosia. She said that she was worried about losing all of her ‘life savings’ if anything happened to the Bank of Cyprus. After my immediate feelings I did wonder…..

Why do people put ALL of their savings with one bank? Is it that they know no better? Do they think banks are safe?

The EU bank guarantee scheme ‘protects’ funds in any one institution UP TO €100,000. Even with sums lower than this there is still a strong argument to spread your savings. In the event of a catastrophe, it could be weeks or even months before you can get your hands on YOUR OWN money!

In the last week, the Bank of England has announced that UK Banks need an ADDITIONAL £25 Billion in reserves to be certain that no more taxpayer bailouts are necessary.

It’s just an opinion but I have serious doubts about the security of Spanish banks. Assurances from politicians are certainly no comfort! Could Spain, Greece, Italy or Portugal follow the example of Cyprus and put a tax on savings? I’m not certain one way or the other.

So not only do I believe in spreading amongst banks, I also think that other institutions should be considered. In particular I would advise that everyone should first of all consider the difference between savings & investments.

Initially you might think there is no difference, but I’d like to suggest the following distinction

  • Savings are almost an unconscious decision to put money in a deposit account or even under the mattress! The historic view is that the money is ‘safe’. The Cyprus experience is evidence that the capital is NOT necessarily safe. In addition, in most of Europe it is the norm that interest rates are lower than the level of inflation.

So if the capital is NOT safe and the value is deteriorating through inflation, deposit accounts are RISKY NOT SAFE.

  • Investing is much more of a conscious decision to provide for a future event and usually over a longer period than savings. Traditionally, it has been thought that there is more RISK involved in investing, yet spreading your investment is an obvious strategy.

Some of the ways of spreading include investing in more than one currency and another is being in more than one ‘asset class’ such as Government Stocks, Property, Stockmarket investment and much more. Also remember than pension plans ARE investments.

I make no apologies for repeating my often repeated plea;

Get Professional Advice which is summarised in a previous post. There really is no alternative but who gives that advice is VITAL. Professional advisers must offer the following:

  • No upfront fees
  • Be fully regulated to give advice
  • Carry Professional Indemnity Insurance (just in case something goes wrong)
  • Give regular reviews of your investments (I recommend annually)

I can recommend professional advisers in both UK & Spain but will only refer them if I have satisfied myself that they meet MY CRITERIA, mentioned above. Please email me with brief details for a professional referral.

A professional adviser will discuss ALL of your options.

This post is of course generic and based on my personal experience, advice should only be given on a personal basis taking into account your own objectives and preferences.

David Goodall
Financial Pages in Spain

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