DIY investor: just my luck

Although I would love to claim some skill as an investor, the most important lesson of my experience over the past few years is that luck matters far more than many would like to admit. Yet another reminder of this surfaced recently in the shape of the annual statement for my index-linked savings certificates. These are fixed-term, tax-free deposits offered by National Savings & Investments that pay a rate of interest linked to inflation: in this case, 1 per cent above the retail prices index (RPI) for three years.

In the days when we still had inflation, these certificates were popular with cautious investors looking to protect the value of their capital. In July 2010, I put in the maximum permitted in the belief that inflation was bound to pick up at some point given the amount of money that was being created. Two weeks later, the Treasury abruptly withdrew index-linked savings certificates from sale and although they were briefly relaunched the following year they quickly disappeared again and have not been seen since.

That was the first of several lucky breaks. Almost immediately, inflation picked up strongly and hovered around 4-5 per cent for much of 2011 and 2012, delivering me a return of 5-6 per cent with no tax and no risk. Then, very soon after I had invested, the government began switching to a different measure of inflation, abandoning RPI in favour of the consumer price index (CPI) as the benchmark for calculating annual increases in all sorts of welfare payments.

For any who don’t follow these things, it will not come as a surprise to learn that CPI typically comes out lower than RPI by up to 1 per cent thanks to the way it is calculated, handily reducing the state’s outgoings. However, my luck held. For a few purposes, including the calculation of interest on index-linked government bonds and savings certificates, the Treasury decided to stick with RPI, mainly to avoid causing problems for the big insurers and pension funds that buy most index-linked gilts.

In 2013, at the end of the initial three-year term, my money had grown by around 15 per cent. But if I wanted to continue for another three years the deal was not going to be so good—instead of RPI plus 1 per cent, I would be getting RPI plus 0.15 per cent. I decided to stay put. After all, my stroke of luck in avoiding the switch to CPI meant that my return would still be around 1 per cent more per year than if it was linked to the government’s preferred measure of inflation.

Two years later, CPI inflation is zero and RPI is 1 per cent, producing a net return for holders of the certificates of 1.15 per cent. That’s not as high as the best cash ISAs but it’s not too far off, and they don’t have built-in inflation protection.

But with inflation so low, wouldn’t it make sense to cash in these certificates? Surely I could do better elsewhere? Maybe, but this experience tells me to trust my luck more than my ability to find a similarly low-risk home for the money.

There are two main reasons. First, very few people are offering guarantees about future income nowadays, least of all inflation-linking, so if I have something that no one wants to offer me, my instinct is not to give it up. Second, with attractive, low-risk returns so hard to come by, the inevitable temptation is to take on more risk with every investment you make in the hope that some of them deliver handsomely. But I have plenty of risk elsewhere and it’s more important to balance that with some solid, if unspectacular, choices rather than to try for a six with every throw of the dice.

Besides, the certificates are a welcome reminder that you cannot know what’s round the next corner—perhaps inflation isn’t as dead as it looks.