The penny dropped slowly, but painfully, for an army of small savers in 2010: feeding money regularly into a bank or building society account is hardly worth the bother.
With savings rates so far below the level of inflation, a national newspaper stunned its readers last week by telling savers they should either put spare money into equity income funds, which hold shares in secure global companies paying healthy dividends, like GlaxoSmithKline (GSK), Royal Dutch Shell and Vodafone, or blow it.
Savers are desperate because since March 2009, when the Government slashed the Bank base rate to 0.5%, its lowest level in more than 300 years, they have been sacrificed to keep the economy afloat.
But is early 2011 the right moment for savers to take on more risk by switching into equities?
Remember that thousands of small BP investors probably lost more than a fifth of their money this year if they sold out when the oil giant was humbled by President Barack Obama's onslaught after the Gulf of Mexico oil spill. Those who stayed in lost their dividend income.
With the benefit of hindsight, we can see the obvious moment to switch from cash into shares was actually March 2009, when rates hit an historic low and company profits were almost guaranteed to rise.
That fed through, in due course, into higher dividends for shareholders and, inevitably, higher share prices as more investors got on board.
In March 2009, however, UK equities were flat on their back too. The FTSE 100, the index of leading London shares, hovered around 3400, and it took nerves of iron to buy into an asset class which others were trying to dump.
Fortune favoured the brave and since then the FTSE 100 has delivered returns of more than 50%, while savers stuck in savings accounts earning an insulting 0.1% are watching money melt away.
Now, with the FTSE 100 approaching 5900, equities are being suggested as the best way to protect savings in the next couple of years.
A survey by the Association of Investment Companies (AIC) found that 92% of fund managers expect equity markets to rise in 2011, with more than three-quarters (77%) predicting the FTSE 100 will finish 2011 between 6000 and 6500.
On paper, that might not look like a huge rise, but shares, and the managed funds which buy individual shares on behalf of investors, can deliver a two-way return.
Firstly, there is the chance of capital growth - a rise in the value of the underlying investment.
Some equity sectors - notably emerging market economies like India, the Far East and Latin America, and those linked to the soaring price of commodities, like mining firms and metal producers - have enjoyed double-digit rises in the past year.
But many shares, and managed funds, also deliver regular income, in the form of dividends paid twice yearly.
Many global companies, which should be resilient to further recession in the UK economy, currently pay dividends around 5%. Others like global services group Compass said it will raise dividends after a profits surge in 2010.
In some funds which are structured mainly to pay regular income to older investors, the pay-out can be four times a year.
One of my favourite investments, the Henderson High Income Fund, will pay more than £400 this year on an investment worth £6,000. A similar sum in a building society would have struggled to earn £100 before tax this year, and might have produced a lot less.
Savers, therefore, probably need some equity exposure in 2011 to get a decent return on their money.
Rob Pemberton, investment director of wealth manager HFM Columbus, says: "There are excellent opportunities within the markets, and income seekers in particular can do reasonably well from bond-based investments currently yielding around 4%.
"It is basically impossible to get anything like that within the ordinary savings market, so we think investors - even those with a modest appetite for risk - must venture beyond the high street to outpace inflation. The alternative is slow but steady capital erosion."
Eddie O'Gorman at investment advisor the WAY Group, says: "When savings accounts pay their current low rates, savers lose money once inflation is taken into account.
"Anybody invested in a good spread of income and growth equities and bonds in 2010 has typically seen returns around 5-6% on a well balanced portfolio.
"We think markets are set to perform well throughout 2011, and recommend a degree of exposure to wider stock market and bond-based investments."
"Those with no appetite for risk of any kind are probably best off with cash-based ISAs or National Savings & Investments - but must be prepared to suffer muted returns at best."
The risk of UK shares is that they have already come up a long way.
Jeff Molitor, at low cost fund manager Vanguard, says: "The risk is that if UK stocks outperform for a time, many investors will reallocate back to the UK market after the fact, launching a new round of buying high and selling low... a strategy with a low probability of success."
So, how much of your savings is it sensible to move into shares?
Given the risks, it makes sense to feed in money slowly on a regular basis. And don't forget the standard advice: money invested in shares is money you are prepared to lose.
At the very least, never buy shares with money you might need in a hurry.
Next question: who puts your portfolio together?
Nick Raynor, investment advisor at The Share Centre, which provides cheap dealing systems for small investors, says: "Give consideration to the amount of control you want over your portfolio, depending on how confident you are about the market.
"There are various degrees of control you can exercise over investments, including discretionary management, investing via a fund manager or managing the investment yourself."
The cheapest way to buy shares is through discount brokers, but that assumes you know which shares and funds you want to buy.
In search of income, small investors seem to be taking quite a lot of risk. The Share Centre says its list of top purchased funds in October was headed by Aberdeen Multi-Manager Emerging Markets followed by Legal & General (L&G) UK Index Trust; Aberdeen Emerging Markets; First State Indian Subcontinent; and Threadneedle Latin America.
Apart from the L&G fund, which holds lots of Child Trust Fund money, I find that list fairly risky; my spare money lately has gone into global giants like GSK, and income funds like the £540 million Merchants Trust, founded in 1889 and paying a dividend of 5.85%, available tax-free in an ISA.
If you are a frustrated saver, don't step lightly into shares in 2011 and be sure to take get good advice before you write out the cheques. With troubles far from over in the Eurozone, shares could also have a rocky ride in 2011.
:: Information: The Share Centre (01296 414 141 and www.thesharecentre.co.uk); Hargreaves Lansdown Stockbrokers (0117 980 9800 and www.h-l.co.uk); HFM Columbus: (01892 500 450 or 01932 870 000 and www.hfmcolumbus.com); WAY Group: (01202 890 895 www.waygroup.co.uk).
Investment advice is also available from the Association of Investment Companies (AIC) at 020 7282 5555 and www.theaic.co.uk.
Poundnotes
:: An early Christmas goodie from first direct, the online subsidiary of HSBC, is a new two-year tracker rate loan at 1.49% above base rate (current pay rate 1.99%). The lowest-ever mortgage rate from first direct should appeal to homeowners nervous about their standard variable rate (SVR) loans.
There's a £999 booking fee, with option to cut the fee to £99 if you pay 1.69% above base rate (2.19%) for the first two years. Maximum LTV is 65%.
Until the end of January, borrowers will get the usual costs of changing lenders covered by first direct, including standard valuation, legal costs, and any enquiry fee charged by their existing lender. All they pay will be the booking or arrangement fee, from £99.
Enquiries: 0800 482 448.
:: Income seekers will be attracted by the Schroder Global Property Maximiser Fund, which aims to deliver a 7% yield from bricks and mortar with the dividend paid quarterly. Open to investors from February, the fund should build on the success of the Schroder Income Maximiser, a sturdy performer in the last five years.
:: The savage weather means the average winter bill will hit £630 - that's £509 for gas and around £120 for electricity - in 2010/11, says Mark Todd, director of comparison service energyline.com. He says the difference between the most expensive and cheapest energy deals has zoomed to £369 per year, so it is essential to search the market for a cheaper supplier.
:: People nearing retirement and hoping to arrange income drawdown on their pension will see the maximum amount they are allowed to take each year fall from April 2011, says investment trust Alliance Trust. Somebody with a £200,000 pension fund currently entitled to take £16,320 per year will see the limit fall to £13,600 from April 6, 2011.
Suggestions of a 'cash machine' pension for income drawdowners may be a slight exaggeration, it seems.
Alliance Trust enquiries: 01382 573 737.
:: High five savers
Phone No Rate Account Period Deposit Interest paid
Coventry BS 08457 665522 4.75% Fixed Bond (128) 30/04/2016 £1 Yly
SAGA www.saga.co.uk 4.50% (F) Fixed Rate Savings Five Year Bond £1 Yly
AA 0845 603 6302 4.50% (F) Fixed Rate Savings Five Year Bond £1 Yly
Dunfermline BS 0845 733 6688 3.00% 60 Day Notice 60 Days (B) £1,000 Yly
Cheshire BS 0800 243278 2.95% 30 Day Postal Saver 30 Day (P) £1,000 Yly
:: Top five borrowers
Phone No Rate Period Max% Adv Fee Incentive
HSBC 0800 494999 2.29% (rem) variable for term 60% £99 Yes
Hanley Economic BS 01782 255000 2.29% for two years 60% £698 Yes
First Direct 0845 610 0100 2.59% variable for term 65% £99 Yes
ING Direct 0845 603 8800 2.85% disc until 31/03/13 70% none Yes
Hanley Economic BS 01782 255000 2.85% until 31/01/13 75% 75% Yes
Code:
*K- Operated by Internet, Telephone, or Post
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).
