05 September 2019
By Thomas Marron
06 14 24 61 29
With Brexit and global economic uncertainty disrupting currencies and markets, now is a good time to review how you structure your savings and investments.
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 and wealth 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 latest decision to leave the interest rate alone means the UK rate has been stuck at 0.75% for a year. You would now have to go back over ten years, to January 2009, to find the last time UK rates went over 1%. In the US, the Federal Reserve cut its interest rate for the first time in over a decade, to a relatively high 2-2.25%. Elsewhere, such as in Japan and the eurozone, 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 ten-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 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.
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% more than in 2010.
But it could be worse. Two Swiss banks have announced they will pass negative interest rates on to wealthier customers, charging 0.4%/0.6% for deposits over €500,000/1 million; a Danish bank has since followed suit.
While in the UK it is usually possible to achieve higher rates through longer term deposits, the growth will still struggle to outpace inflation. You would also be prevented from taking advantage of better opportunities if interest rates increase during that period.
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 in France, 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 – August saw the value of sterling against the euro drop 5% 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 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 France.
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.