Best Investments During Low Interest Rates
Interest rates continue to remain abysmally low as the government attempts to stimulate the economy. Not only is this type of government intervention ineffective, it’s terrible news for savers. If you have money in savings accounts, you are probably scratching your head wondering where to invest your money into.
You’re not alone.
We are currently living in a very strange banking era. Many international Central Banks are printing money and offering negative interest rates in hopes of stimulating their economies. All this strategy is really doing is stifling natural economic growth and delaying a possible financial collapse.
I’m not an expert in fiscal policies but I’ll try to explain one part of the negative interest rate issue. Government controlled Central Banks offer “we’ll pay you” cheap loans to private and commercial banks hoping they will re-lend the money to individuals and businesses. The problem is these private banks can’t find enough people to loan money to. The Central Banks money ends up sitting in the private banks virtual vaults due to the lack of borrowers while at the same time, Central Banks print even more money.
And so the cycle continues.
Negative interest rates are a last ditch effort to keep an economy afloat. Very few governments can balance their own budgets so why they are involved in banking is beyond me.
Enough fiscal boredom, let’s discuss what you really care about. What are the best investments to put your hard earned cash into?
Remember in the early 2000’s when you could take a one-year fixed interest bond paying 5%? Those good old days are long gone. With the recent interest rate cut, people (myself included) are wondering what to do with their money. Long term saving account balances earning 1% are relatively safe, but inflation will chew up your cash like the Chewits monster chewed Chewits (that’s a lot of chewing).
For you young people who don’t know about the Chewits Monster:
(Chewits are delicious, but back to business.)
We cannot change the low interest rates; they are here to stay indefinitely. If you have extra cash, I always recommend paying off debts (other than your mortgage) first. If you are debt free, here are some of the best investments to consider (higher grades mean lower risk and vice versa):
Best Investments: Peer to Peer Lending
Overall Risk: C-F
Risk of Total Capital Loss: D-
Returns: B+ to C
If you are a reader of this blog, you will know I’m a big fan of peer to peer lending. Despite being a fan, I’m still only comfortable putting about 15% of my savings into peer to peer. The main reason I’m hesitant to risk more is barely any peer to peer companies have survived an economic downturn.
If you are an investor in peer to peer lending, you may have already noticed some platforms cutting lenders return rates. Peer to peer is taking collateral damage from the low interest rates.
When interest rates are low, loans are cheap and peer to peer sites fight for loan customers. Lower interest rates means lower returns for lenders. It’s simple demand and supply in which borrowers benefit and lenders suffer. It also hurts some peer to peer sites as they receive less in the way of loan underwriting fees.
Those of us who experienced Ratesetter paying 7%+ returns find it hard to accept these lower returns. But even though returns are dropping, we have to be disciplined not to be complacent and move too much money from the safer peer to peer sites to the 12% return sites. Diversification is key because if you put all of your eggs into one high interest paying site and it collapses, you’ll be wishing you hadn’t.
My safer Ratesetter and Landbay investments will mostly remain in tact for now. I still consider peer to per lending one of the best investments while interest rates are falling.
Best Investments: Stock Market
Overall Risk: *B
Risk of Total Capital Loss: *A-
* My risk grades assume you are buying low fee, no nonsense index trackers and that you won’t touch your investments for at least five years. If you dabble in VCT’s, single shares, trading or other funny investments, my risk grades would be in the C to F range.
I’m still pro stock market as I believe it is one the best long term wealth building options. The issue right now is the indexes are more inflated than Donald Trumps ego.
Why are stock market levels so high at the moment? Demand and my good friend TINA (There Is No Alternative). When interest rates fall, people feel falsely safe, look for yields and pile money into stocks.
Also lots of foreign money is moving into the stock markets, especially from Japan and China. This influx is moving the markets higher despite all the red flags of historically high debt and low company growth.
Inflated stock markets present a dilemma for many people. Sit in cash and wait for a correction or throw caution to the wind and continue investing with a long term plan. Many people contact me with fears of buying into the stock market because it is so high. It’s a reasonable fear but we don’t know when the markets will decline. By sitting on the sidelines, you could miss out on one the greatest bull runs of all time. Articles dating back to 2011 said a crash was right around the corner. My article on Bob, the worlds worst stock market timer should help ease your fears.
If you are sitting on cash and are 20-40 years old, you could consider pound / dollar cost averaging into index trackers even though the markets are high. Pound cost averaging means you average your purchases over a period of time rather than buying all your funds at once. For example, investing £10,000 at £1,000 per month over ten months instead of buying £10,000 of funds at one time. This way you buy through the market highs and the lows, averaging out your fund costs. I still think it makes sense to be 100% invested to take advantage of this historic bull run, but there are advantages and disadvantages to both pound / dollar cost averaging and buying all at once.
Some financial experts recommend buying dividend paying single stocks. I think this is extremely risky. How will you know which stocks to buy? Picking single stocks is terribly risky because they are so adversely affected by day to events. History has shown most financial advisors can’t predict future stocks results. Read my article here about why I stopped buying single stocks.
There is always a chance that the stock market could implode as no one knows the future, but despite being overvalued, I still consider the stock market one of the best long-term long term. Index stock and bond trackers are great options as long as you don’t need the money for at least five years and you are disciplined to buy and hold ignore the volatility. (Here is my article on which index trackers I buy.)
Best Investments: Property
Overall Risk: C+
Risk of Total Capital Loss: A
Returns: B+ to C
I like property but the downsides are glaringly obvious. The high cost of entry is the main reason people don’t own rental property. I never recommend financing rentals unless you have the cash the pay off the mortgages in case of an emergency. Personally I like to sleep at night so the horrifying idea that a bank can take my rentals steers me clear of financing.
Some people will disagree with me on financing rentals and I have friends that have financed many rental houses. These people rarely factor risk into their financing decisions. I know people who fell sick, were unable to work for a year and fell behind on their rental house mortgages. Their rental properties were subsequently repossessed by the bank. My fears also point back to 2009. Millions of people were bankrupted because of property speculation. This could certainly happen again.
Investing in property can be risky. It is possible to overpay, buy a home with unforeseen problems or be cursed with dreaded vacancies. Landlording isn’t easy (I speak from experience) and paying a property managers eats into returns.
If you have enough money, buying rental homes for cash can make you wealthy. You have to buy right and make sure the property always positively cash flows by at least 20% over your expenses. Property appreciation has remained strong in most areas of the UK and the rental demand continues to climb due to the lack of new home builds.
If you are itching to get involved in property investing but don’t have the financial capability, take a look at some of the peer to peer options such as Property Moose and Property Partner. These platforms allow you to own property shares for small entry amounts.
Another factor is the increase in UK government stamp duties on buy-to-let properties. This extra tax has greatly increased the entry cost of investment property.
Buying property outright has a cost of entry high, but if you have the cash and can avoid the temptation to finance, property ownership still remains one of the best investments to build long term wealth.
Best Investments: Yourself
Overall Risk: ??
Risk of Total Capital Loss: ??
One of the best investments you can make is in yourself. This could be in the form of going back to university, taking classes, retraining or earning professional accreditations. Your income is your greatest tool in life.
Maybe you have always wanted to work for yourself. You could invest in opening a new business, even if it’s just part time.
Take this blog as an example. It was never a planned project but I enjoy the finance world so I gave it a try. The blog generates a bit of pocket money and maybe one day, it will grow into something bigger.
Best Investments: Cryptocurrency
Overall Risk: F
Risk of Total Capital Loss: F
The recent explosion in cryptocurrency has the financial world mumbling about crashes of epic proportions. Meanwhile, many people have become overnight millionaires. I considered Bitcoin when it was $2 but like many other, never thought it would appreciate.
Most people don’t understand how to use cryptocurrency, or how it is valued. For example, Bitcoin’s value is based on scarcity and demand and supply. Bitcoin is a limited supply item, capped at 21m units and is traded like a stock. I believe blockchain technology is here to stay but I have no idea where cryptocurrency values will be long-term.
Think of cryptocurrency as a pure gambling speculation play. It might be worth throwing a few quid into the lesser known coins such as Dash and Ripple to see if you can strike it rich.
Alternative Best Investments
Overall Risk: F
Risk of Total Capital Loss: C-
There are plenty of high risk alternative investments ranging from buying shares in oil wells to buying and selling cars. I know nothing about either of those.
I have been dabbling in sports tickets since 2014 and my returns have been a little over 70%. This is high risk and I wouldn’t recommend putting more than a few percent of your savings into this.
The formula is very simple. Buy season tickets for sports teams and resell them on ticket websites. Season tickets are always discounted versus single game tickets.
What types of tickets do I buy? I pick sports I’m interested in because I know which teams are popular and understand which games will be in high demand. I also buy season tickets for overseas teams. If you plan on doing this, make sure you buy the tickets directly from the sports clubs themselves and not from third parties.
The risk with sports tickets is that you may not be able to sell. Fortunately the internet offers many ticket selling websites. I place the tickets for sale as early as possible then adjust the price as needed. All the tickets are electronic so once the tickets sell online, the ticket is emailed to the buyer.
Some of the ticket selling websites require you to manually upload the tickets once they are sold. This means you have to be well organized, especially if you list tickets for sale on multiple sites. Once a ticket sells, it has to be immediately removed from the other sites.
Some think ticket reselling is unethical but it is really just demand and supply. Peer to peer lending where lenders receive 12% returns could be called unethical since borrowers are paying 1.5% interest monthly. Jewellery stores sell items for a markup of between 100-300% but it isn’t considered unethical, purely demand and supply. If you consider an investment unethical, you can simply pass.
Buying sports tickets is very risky because of the possibility of economic decline. When this happens, luxuries such as sporting events are the first to go. There is also the possibility of being unable to sell the tickets so you’d better be prepared to go to some sporting events.
The key to sports tickets is to start small. Buy the cheap seats to test out the market, then take the capital and profit and buy better seats the next season. Again, I consider sports tickets high risk but over the last two years, they have been one of my best investments returns wise.
I would advise that alternative investments make up no more than 5% of your investment portfolio. My sports tickets are only 2% of my investment portfolio.
Overall Risk: A
Risk of Total Capital Loss: A
Why no A+ grade for overall risk? The only reason banks are considered low risk is because of the governments FSCS guarantee. There is always a risk the economy implodes, the banks crumble and the government can’t pay all the guarantees. Is it likely? No but it’s possible. No investment is 100% safe.
For the safety, you sacrifice returns. For those willing to jump through hoops and have deposit limits, you can get some decent interest rates on some savings accounts. These savings rates are also variable and can change anytime. I’m sure you have gotten the Santander rate drop letter; other banks will be following soon.
Foreign banks such as RCI are offering slightly higher rates but are riskier because they aren’t covered by the same UK FSCS guarantees. I don’t think a 0.5% interest bump is worth the extra risk of putting your cash in a foreign bank.
Leaving your cash in the bank getting 1% interest is a losing proposition. While inflation has been low over the last year, it will eventually rise and devalue your money as goods and services become increasingly expensive.
I do recommend keeping an emergency savings account containing six months of your total living expenses. Use the rest of your cash to pay off any loans or credit cards. Any left over cash, throw at your mortgage.
“Pay off my mortgage?” I hear you asking, “But interest rates are so low.”
True but being debt free is the way to become wealthy. When you have no loan payments, you have lots of extra cash to invest. Also should disaster strike, no bank can ever take your home away if it isn’t mortgaged. I bet some of the people who lost their homes during the 2009 mortgage meltdown wished they didn’t have a mortgage.
Don’t ever think this can’t happen to you. I know many successful people who experienced unexpected hardships and lost their homes.
Overall Risk: A
Risk of Total Capital Loss: A
Another safe but low return investment. No sense in taking a one year savings bond at 1.25% when you can get the same interest rate in an easy access savings account.
Overall Risk: A
Risk of Total Capital Loss: A
I recently told my mum she needed to sell all her premium bonds. She pinched me on my arm, told me I was a terrible son and to never speak of such things again.
I then explained to her what a terrible investment Premium Bonds are. She was still quite distraught after I showed her the odds of winning, but agreed to sell provided she could keep £100’s worth. Mum likes opening the daily post to see if she has won. It’s her way of having a flutter.
Mum is a tough negotiator so I reluctantly caved to the £100 hold out.
Premium Bonds have been a long time UK favourite
gambling investment vehicle. “But they are tax free!” you say. “But sometimes I win” you say.
Yes Premium Bonds are tax free but the tax benefits aren’t what they used to be. Since the introduction of the Personal Savings Allowance, 95% of people won’t pay any tax on savings. Savers can now earn up to £1,000 interest tax free in the 20% bracket, and £500 in the 45% bracket. This negates the Premium Bond tax advantage for most people.
Even with the tax benefit, I still wouldn’t own Premium Bonds.
It is true you have a chance of winning the £1million prize. A 30 million to 1 chance!
Here are the odds of winning Premium Bonds:
The chart says it all. You have very little chance of winning anything and every chance of winning nothing.
Truth is Premium Bonds yield less than 1.25% annually and that’s if you have good luck. Even with the tax break, Premium Bonds aren’t a good investment. I don’t know anyone who has won more than £250 at one time.
Overall Risk: C-D
Risk of Total Capital Loss: B
My family is in the jewellery business so I should be a big fan of gold. In times of turbulent economies, gold salesmen come crawling out of the darkness in droves touting gold as a good investment because of its safety.
The fact is gold has never been a good long term investment and remains as volatile as the stock market. Take a look at how gold prices have fluctuated over the last 100 years:
An ounce of gold in Jan 1915 cost about $450. That same ounce of gold was worth $229 in Jan 1970. Not such a great investment!
If you bought an ounce in in May 1974 you would have paid $795. That same ounce in Jan 2001 was worth $359.
You need the same crystal ball to time gold as you need to time any volatile investment.
For me, gold is an insurance policy against a complete economic meltdown. Many countries have experienced hyper inflation so yes, an economic meltdown could happen. Even the USA experienced two currency collapses (1812 and 1861) and we all know that famous German photo:
Even in dire economies, gold is only worth what someone will pay (or trade) for it. I consider any precious metal in the same category as gold.
It is fine to own some gold if you want a bit of insurance in case of an economic meltdown, but it isn’t a good investment.
Still aren’t convinced? Ask the people who bought gold in Jan 1980 when it was $2,000 an ounce. Gold is definitely not one the best investments.
Best Investments Conclusion
In the low interest rate savings era, savers are considering investments they wouldn’t have considered when interest rates were 5%+. Always remember to factor risk into your choices. An investment that was risky when bank interest rates were 5% is still risky. Don’t let the low rates make you feel desperate for higher yields because you may end up in a high risk investment you wouldn’t have normally considered.
I hope this article gives you some ideas of where you can look to find the best investments that maximise your savings.
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