Why Property? Part IV; Venture Capital and Savings
In the fourth segment of ‘Why Property?’ I take into consideration two other forms of investment, venture capital and savings, and their credibility against property investment. When thinking of putting money into either of these schemes it is important to weigh up their merit whilst assessing what is best for you.
Venture Capital Investment — Investing directly in a business.
Putting your money into a business start-up, for example, could lead to riches beyond your wildest dreams. Then again, so could buying a lottery ticket. If you have ever watched Dragon’s Den you will get some idea of the type of person who is normally associated with venture capital investments. Do you have what it takes to ask an entrepreneur all the right questions to judge the viability of the proposed investment? Do you have the time needed to keep an eye on the business to ensure the money you have invested is being spent in a prudent and productive way? This is a very demanding type of investment opportunity and it requires a highly developed business sense.
You could invest your money with a firm specialising in venture capital and leave all the decision making and day to day running of the investment for you. This leaves you in a position similar to that you would find yourself in when handing your money over to a pension fund manager, only this time, failure on the part of those managing your funds could result in you losing all of your investment. Venture Capital can be rewarding as you watch a business develop and grow into something wonderful, but it is certainly not for the faint hearted and is probably best left to those who can afford to take a gamble and lose without endangering their entire financial future.
If you decide that venture capital is for you and you don’t mind the prospect of handing your money over to a venture capital management company, make sure that you understand fully the kind of risks that the company will be taking on your behalf. Some venture capital firms manage risk more effectively than others — they might only invest in firms that have been trading successfully for some time and they are only looking for money to expand. Other venture capital companies specialise in acquisitions and mergers — these have proved historically to be less risky than genuine start-up investments.
Savings; Invest your money in a bank or building society savings account.
Some might say that as a taxpayer they have put quite enough of their money into the banking sector in recent years. Traditionally a savings account with your local bank was the first choice for millions. We were taught from an early age to save money and many banks organised weekly visits to local schools to make the whole process easier, and more importantly, habit forming. For many this habit continued into adulthood. Once upon a time banks were considered safe and sober institutions and if you wanted to be certain that your money wasn’t being gambled recklessly then there was no safer option. In many respects that idea is true. Even at the height of the credit crunch with many banks on the verge of failing, their importance to the financial wellbeing of the nation meant that the government simply couldn’t allow the banks to fail. They were thrown a lifeline that many other businesses would never have received and the government guaranteed the savings held by individuals, up to a certain level.
On the surface a bank would appear to be a safe option for your money. That is true but it is not the same as saying that putting your money in a bank is the safest option to secure your financial future. The interest rates paid on savings accounts are small. Like the interest charged on loans, many of these rates are linked to the Bank of England base rate and as this rate has been at historically low levels in recent times, so too have the returns paid on savings accounts (which are never that high at the best of times).
Banks and other institutions do offer other savings products which guarantee slightly higher interest rates, some of which come with the added benefit of tax incentives. Even with these products, the return on your initial investment is still much lower than you could expect from other forms of investment, such as property, and in many cases you are simply not going to see enough growth on that initial investment to provide you with a comfortable financial future.