These are challenging times for investors, especially for those looking for growth through low-risk investments. We explore the current climate and how you can protect and make the most of your savings today.
Today’s fixed interest environment
Bank interest rates around much of the developed world have been extremely low for some time. The Bank of England’s interest rate has been stuck at 0.75 per cent for a year. You have to go back over 10 years, to January 2009, to find the last time UK rates went over one per cent.
In the US, the Federal Reserve cut its interest rate for the first time in over a decade in July. Elsewhere, such as in the eurozone and Japan, there are even negative rates.
Meanwhile, the yield on government bonds (gilts) has also experienced some decline worldwide. Usually, as a reward for locking your money away for longer, a 10-year government bond would provide a higher interest rate than a two-year gilt. However, the reverse – known as a ‘negative’ or ‘inverted yield curve’ – occurred in August for both UK and US gilts, for the first time since 2008 and 2007 respectively. In Germany, the entire bond market dipped into negative territory.
What does this mean for savers?
While many bank deposits have been earning next to nothing for years, inflation continued to creep upwards – averaging 2.3 per cent in the UK since 2010. Prolonged low interest rates mean funds in UK savings, ISA or deposit accounts are failing to keep up with the cost of living. Last year, the average 0.23 per cent offered by UK easy access savings accounts meant the average saver lost around £500 in real terms.
Of the approximate £1.3 trillion held in UK household cash deposits as at February 2019, an estimated £170 billion makes no interest at all – 70 per cent more than in 2010.
It could be worse. Two Swiss banks announced they will pass negative interest rates on to wealthier customers, charging 0.4/0.6 per cent for deposits over €500,000/1 million; a Danish bank followed suit.
With interest rates expected to remain low for some time, achieving better returns than bank deposits means widening your investment horizons. However, it is crucial to factor in diversification and your personal appetite for risk.
Reducing investment risk
Many people worry about the risks of investing money for capital growth but overlook that there are also risks with leaving money in the bank.
Even the biggest financial institutions can fail. And we have already looked at how cash deposits can be eaten away by inflation over the longer term.
While market dips can be unsettling, you can reduce risk by being invested for the medium to long-term in a well-diversified portfolio. The key is to spread investments across different regions, asset types and sectors to limit exposure in any one area, using a strategy matched to your particular situation, goals, timeline and risk appetite.
You could also consider spreading the timing of your investments by investing capital in tranches. This ‘pound (or euro/dollar) cost averaging’ approach can help smooth out volatility and potentially improve overall returns over longer time periods.
Currency and tax considerations
If you hold non-EU based investments, you also need to factor in currency exchange costs. For example, it can prove more expensive to take income in sterling when your key expenses are in euros, especially amid Brexit uncertainty; August saw the value of sterling against the euro drop five per cent since May to reach a two-year low of €1.0794.
To minimise conversion fees and exchange rate risk, explore investment options that enable currency diversification and flexibility. Some multi-currency arrangements allow you, for example, to invest in sterling and switch to euros at a later date. You could also select the currency of withdrawals.
Do not underestimate the impact of taxation. Explore locally-compliant arrangements that can shelter capital from tax while providing a tax-efficient income in Malta.
Establishing your approach
As always, when considering investment options, you need a long-term, diversified strategy based around your personal circumstances, objectives, risk profile and time horizon. For the best results, take personalised professional advice.
Kevin Cassar is regional manager, Blevins Franks.
All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation or investment advice. Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.