Time to take interest in your investment options
These are challenging times for investors, especially for those looking for growth through low-risk investments.
Bank interest rates around much of the world remain extremely low. The UK rate has been stuck at 0.75% for a year – you would now have to go back over ten years to find the last time it went over 1%. In the US, the Federal Reserve cut its interest rate for the first time in over a decade. Elsewhere, such as in Japan and the eurozone, there are even negative rates.
What does this mean for savers?
While many bank deposits have been earning next to nothing for years, inflation has continued to creep upwards – averaging 2.3% 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% offered by UK easy access savings accounts meant the average saver lost around £500 in real terms.
But it could be worse. Two Swiss banks have announced they will pass negative interest rates on to customers with deposits over €500,000/1 million; a Danish bank has since followed suit.
With worldwide interest rates expected to remain low for some time, achieving better returns than bank deposits means widening your investment horizons to consider ‘riskier’ assets. 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 have UK investments but are living abroad, you also need to factor in currency exchange costs. Once your key expenses are in euros, it can prove much more expensive to take income in pounds, especially amidst Brexit uncertainty.
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 now and switch to euros at a later date if you wish. You could also select the currency of withdrawals.
Do not underestimate the impact of taxation too. Explore locally-compliant arrangements that can shelter capital from tax while providing a tax-efficient income in Spain.
Establishing your approach
As always when considering your 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.
With the right balance of risk and return for your peace of mind, you will be best placed to ride out this long low of interest rates, as well as currency or market turbulence in these uncertain times.
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