Beat the Interest Rates with Your Savings
How do you beat interest rates? The first thing to decide when considering how to generate good returns from your savings when the interest rates are so low, is the timeframe. Over what period do the savings have to work to generate the returns?
SHORT TERM INVESTORS
If the answer is less than approximately 5 years, then the only ‘safe’ option is a cash deposit.
What kind of access do you require?
So, if you’re looking at generating short term returns the 2nd question is one of access to your cash. If access is required during the period, then is it instant access or would a notice period of say 28 days or longer be acceptable? The longer the notice period, then the better the rate of interest should be.
What service do you require?
3rd question is ‘do you require a branch service, or would internet/telephone service be sufficient?’. If you can manage without a branch office, interest rates should be higher.
There are a multitude of websites where all this information is available, it does of course change quite frequently. If your deposits exceed the limit of protection provided by the FSCS – £85,000 per individual, per institution – you’d be better off spreading your money over two or more accounts to make sure it all benefits from this protection.
MEDIUM TO LONG TERM INVESTORS
If your savings can be left to grow for approximately 5 years or more, the options open up enormously.
Investing in shares and bonds
Traditionally medium to long term investors would consider investing in asset classes such as shares and bonds. The word bond in this context refers to government (Gilts) & company loans. Exposure to this asset class is often via a managed pool of such loans, in the form of a Unit Trust, OEIC, ETF or Investment Trust. All terms which are probably very confusing to most people.
The medium to long term rewards from investing in these assets are usually significantly higher than the returns provided by cash deposits, regardless of the rate of interest being earned. This area is however very specialised and the assets needs regularly monitoring so if you require more information, then do take professional advice.
Do you like risk?
One other major aspect to consider is what level of fluctuation in value you are comfortable with. This is often referred to as your risk profile and your risk profile might well vary. Those who have a greater tolerance to volatility and are prepared to risk larger losses in value in the short term, can benefit fromthe potential of higherreturns. Traditionally thistype ofinvestor would hold more shares than bonds, which overmosttime frames produce higherreturns. The investor with less tolerance to volatility, would traditionally hold more bonds than shares.
I must finish by pointing out that we are currently in very unusual times due to the length of time that we have had record low rates of interest. When interest rates start to rise again, as eventually they must, bond values will fall.
These times call for even greater care on an appropriate asset allocation. If in doubt, consult an expert. The added value an adviser can add to your investments should never be under‐rated, especially at a time when it is so difficult to beat interest rates.
Posted by David Finan and appeared in Vouched For.co.uk
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David Finan, Managing Director