Which high risk investments to avoid

Harvey Jones

There are dangers lurking on the internet, especially if you are a saver searching for a better return on your money...

Many have been seduced by savings vehicles offering anything from 5-15 per cent a year, and lost life-changing sums as a result.

Here are three things to beware of:

 

High returns

Consumer champion Which? ran a series of online searches for popular low-risk savings terms, such as “best cash Isa” and “best savings rate”, and was directed towards products offering high fixed returns, often prominent paid adverts on Google.

Many deliberately blur the line between savings and investment products, to make them seem less risky than they actually are.

Schemes included one promising savers “asset-backed fixed returns” of as much as 9 per cent, while another offered 14 per cent, but with no information on the level of risk involved.

As a general rule, the higher the return you are offered, the higher the risks being taken to achieve it. Another general rule of savings is that if something looks too good to be true, then it generally is.

 

Company collapse

Tens of thousands of savers have been caught out by schemes like this, and now face losing all the money they invested. Mini-bond provider London Capital & Finance (LCF) recently collapsed owing around 12,000 people £236 million, with the average loss almost £20,000. Its fixed-rate Isas offered around 8 per cent, but investors may get just 20p on the pound back. LCF had links to another failed mini-bond firm called Asset Life, which was offering 8.75 per cent a year.

Savers also risk losing their money on crowdfunding peer-to-peer (P2P) lending platforms. P2P platform Lendy, headline sponsor of the Cowes Week sailing regatta, went bust in May owing 9,000 a total of £152 million, on average £16,000 each. If they are lucky, they may recover 58p in the pound.

Lendy offered an incredible 12 per cent a year. As you can see, there is a pattern here.


 

 

No protection

Two thirds of savers who open a cash account do research on the web first, Which? says, leaving them vulnerable to unscrupulous online marketing tactics. If you put money in a standard savings account your money is covered by the Financial Services Compensation Scheme (FSCS) up to £85,000, but you do not get that protection with mini bonds or P2P investments.

This does not mean you should shun them altogether. P2P can offer superior returns, and established players such as Zopa have held up well, but you need to understand the added risk and allow for it.

Another old savings rule applies. Never put all your eggs in one basket. Instead, spread your money around. And always, always read the small print so that you know exactly what you are investing in.

If you are after a savings account, make sure that's what you are getting.


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