20/12/2011

Are financial institutions really the best place to invest for a better financial future?

Millions of people invest on regular basis in products and plans offered by insurance companies and financial institutions. They invest for variety of reasons including retirement, higher education for their children and repayments of their mortgages, amongst many others. They trust these institutions because they believe that their investments will perform better in their safe and capable hands. However, investors’ expectations for a reasonable return on their investment often turns to disappointment, shock and anger.

To illustrate, in 1987, I purchased an endowment policy. This was arranged so that on its maturity in 2012, it could pay back an interest only property loan. I have now been informed that after completing 25 years of monthly payments at £250 per month - amounting to a total investment of £75,000 - I shall receive an absurdly low amount of £95,872.10. If I had deposited £250 a month in an ordinary building society account, earning an average of 5% interest for the last 25 years, my money would have grown to approximately £150,000.

In contrast, during the same time period, many investors who decided to invest their money themselves have managed to profit well from their investments. A good example is the two partners that I had the pleasure of introducing to the property industry in 1986. Their clever investments in commercial properties have made them into one of the wealthiest, most successful entrepreneurs in the UK today.

These two did not sit back and hope that their investments would grow in the hands of others. They looked for commercial properties that represented good value and were occupied by long-term tenants with strong covenants. Once they found such a property, they looked for finance with attractive terms from banks or building societies. Having secured the finance, they then negotiated hard and bought the property at the lowest possible price. They then waited for the value of their purchased property to increase so that they could use their increased equity to refinance and buy more properties. A brilliant yet simple, old-fashioned method of building a property portfolio.

I believe the illusion that financial institutions are the best place for people to invest for a better financial future, is slowly dying. More and more investors are realising that many of the complex policies and plans sold to them were created to benefit financial institutions and their intermediaries at the expense of their investors. Hence, the reason that an increasing number of people are now looking to invest their money directly. The significant increase in the number of new people attending property auctions looking to purchase income producing properties is a good example. As they say, if you want a job done right, do it yourself. In the case of an investment, if you want your money to grow invest it yourself.

Mamad Kashani- Akhavan