With average luck, you're as good as guaranteed to lose - Lowes Financial Management
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The bond where, with average luck, you’re as good as guaranteed to lose

01/04/2017 … Author:

In May the prize fund for Premium Bonds drops to 1.15% meaning that, with ‘average luck’ and a maximum holding of £50,000 you can expect to win £575 per year, tax free.  When considered in the context of most deposit accounts, this is quite a respectable return, particularly given the security of capital afforded from the backing from HM Treasury.  That said, it should be acknowledged that if you have less than ‘average luck’ you could earn nothing each year, the quid pro quo being that you have the chance of winning significantly more each month, albeit the odds aren’t exactly in your favour.   

 An issue Premium Bond holders currently face is that even if they have average luck, they are as good as guaranteed to lose. The same holds true for almost all savers and the reason for this is inflation.  The most recent figures from the Office of National Statistics tell us that prices rose in the last twelve months by 2.3% by reference to Consumer Prices Index and 3.2% by reference to Retail Prices Index. With most pundits and economists, including the Bank of England stating that they believe inflation will rise further, the situation for savers continues to look bleak.

 With inflation at 3%, a Premium Bond investor with the maximum holding but no luck and as such, no winnings, will see the spending power of their capital fall by £1,500 over 12 months.  But even those with ‘average luck’ will see the spending power of their capital go backwards by almost £1,000 over twelve months. 

 There aren’t any deposit accounts currently paying anywhere enough interest to provide an adequate hedge against real inflation.  For many years, let alone decades, the best way to maintain and increase the real value of your capital has been to invest in real assets, stock and shares.  Whilst the risks inherent with such investments often serve to deter people, time and time again it is proven that over the long term, the biggest risk of all is to think you’re taking no risk and instead, let your money be eroded by inflation.

 That said, everyone should maintain an appropriate balance of accessible cash in reserve and given the pitiful interest rates offered on the high street in general, Premium Bonds might still be an answer.

 Beyond that, if want to have any hope of maintaining and improving the real value of your capital in this environment you are going to have to accept alternative risks and this is where we at Lowes excel.  Our investment management philosophy is not one that seeks to achieve double digit returns year in, year out, what we aim to do is treat our client’s capital in exactly the same way as we treat our own.  No one wants to lose money but we all have to accept some risk if we want to attempt to remove the certainty of our capital being eroded by inflation.

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