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What Barclays can teach us about making money

Do you want to make as much money as Barclays boss Bob Diamond? The bank has two messages for us on how to generate wealth.

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by Gavin Lumsden on Feb 16, 2012 at 10:58

There’s more to Barclays than the row over chief executive Bob Diamond’s bonus.

In fact, its ‘casino’ arm has just published some really useful information for savers.

There are two important things that Barclays bank can tell us about making money in the 21st century.

One is bad and the other is good – particularly if you want to take part in our fiver a day saving campaign and start putting money into an ISA or a pension.

First, if you want to make some serious lolly, the lesson from Barclays is one of your best career options remains banking – that is, if you can keep your job and climb the greasy pole!

Barclays has controversial plans to pay £2.5 billion in bonuses to its staff. That’s an average of more than £15,000 per employee. Not bad for a sector making thousands of people redundant.

The bank won’t say what bonus its chief executive Bob Diamond will get until it publishes its annual report in March.
But even if it’s halved Diamond could still gain more than the £1 million RBS boss Stephen Hester had to give up recently.

There is something more useful coming out of Barclays, however.

Ironically, it comes from Barclays Capital, the ‘casino’ investment bank that Diamond used to run.

Every year Barclays Capital publishes its Equity Gilt study. Equity is the posh word for shares and gilt refers to government bonds.

Shares and gilts are two examples of different areas of investment known as asset classes.

The Barclays Capital Equity Gilt Study is remarkable for having data on shares and gilts going back 111 years. It’s what makes it such an authoritative report.

The report tells us two fundamental things.

Firstly, saving is the only way of protecting your money against inflation.

Secondly, reinvesting the income you get from your investments is the best way to enhance your financial return.
Had you been alive in 1899 and bought £100 of shares they could be worth £11,800 today. However, their real value after inflation would be just £160.

Meanwhile, £100 in gilts would have grown to just £57, which after inflation would be worth a measly £1!

Although gilts have done appallingly badly over the very long term they do go through periods when they beat shares. In the past 10 years for example, gilts have given a better return than shares.

That’s why experts often recommend you save into a fund that combines shares, gilts and other types of bonds. That way you increase the chance of growing your money.

The second important lesson from the Gilt Equity study is the power of reinvesting the income you receive from holding investments like shares and gilts.

Most shares pay a dividend and gilts pay a fixed level of interest.  Barclays shows how if the same investor had used their interest to buy more gilts their £100 would be worth £31,459 today.

If they had used their dividends to buy more shares their £100 would have grown to £1.6 million today.

Before you offer to take Bob Diamond out for a drink, bear in mind that total £1.6 million is only equivalent to £22,239 after inflation.

And that £31,459 from gilts is only worth £427 in real terms too after inflation has eaten away its spending power.
Both of those beat what you would have got from cash in the bank or building society.

So, the lessons are: if you want to grow your lolly you need to become a long-term saver and reinvest your income.
In the coming weeks I will say more about the sort of funds you could consider. For more information please look at the guides on The Lolly website.

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