Watch out, inflation’s behind you

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Inflation continues to creep up on savers. Recent figures from the Bank of England show CPI inflation of 1.9% continuing to outstrip the average savings account rate of 1.4%.

Restless savers are looking elsewhere to grow their nest egg, but how can savers make something from their cash while fending off inflation? A well-balanced, diversified portfolio has the potential to usher in a new dawn for beleaguered savers.

So what are the options?

High-Interest Current Accounts

While not strictly investments, high-interest current accounts can provide reasonable returns on a small amount of your capital. However, these offers are subject to various conditions. For example, Nationwide’s Flex direct can earn you a maximum of £125 per month (5% interest on up to £2500) — but this is only available for 12 months and only if you commit to paying in £1000 each month. For investors willing to spend time micromanaging their bank accounts, high-interest current accounts can provide attractive low-risk returns on a modest amount of capital.

Corporate Bonds

Corporate bonds are essentially IOUs issued by companies. Bonds function like loans — you lend the company money, in return the company promises to pay regular interest payments culminating in full repayment of principal at a specified ‘maturity date’.

Large, well-known companies, such as Netflix or Vue, populate the institutional-corporate-bond market, and yields can vary anywhere between 3–15%.

Corporate bonds come in all shapes, yet typically only in larger sizes. With minimum buy-ins of £100,000, ultra high net-worth and large financial institutions dominate the market.

Traditionally investors looking to access corporate bonds have been restricted to bond funds. Bond funds allow investors to diversify across hundreds of different bonds. However, bond funds do not mature or provide a predetermined stream of interest payments. Instead, returns vary on the bonds that the fund’s manager buys and sells, and on current market rates.

WiseAlpha allows investors to gain exposure to individual bonds listed on the institutional market in sizes of £100,000+ for as little as £100. Exposure to individual bonds provides investors with predetermined interest payments and fixed maturities, providing investors with clarity over their cash flows. Investors needing to release capital for a big-ticket purchase may find this greater predictability particularly useful.

Peer to Peer Lending

Peer-to-peer platforms (P2P) cut out banks in the lending chain and instead lend savers’ money to individuals or small businesses unable to finance themselves via the institutional markets or banks. P2P lending can earn investors attractive returns of 7%; however, loans to small businesses may be risky, with the underlying credit quality of small businesses with little publicly available information being unclear; furthermore, the quality of underwriting and default recovery may not be as comprehensive as that found in the institutional market.

Buy to let

The last two decades have seen property prices (and rents) appreciate consistently, providing attractive long term returns. Of course, investing in a brick and mortar physical asset is different from investing in a financial asset. Property investments are less liquid than bonds/stocks. 
You are responsible for the maintenance of the property and have a duty of care to your tenants. Furthermore, investors must be mindful of property specific tax considerations.

Regardless, property remains one of the better methods for generating an income and preserving your capital, making property a useful asset for most investors.

Stocks

Buying a companies stock provides an investor with a share of ownership of the company. Stocks & shares are the most popularised form of investing, with most retail investors living in the stock market. Historically stock markets have delivered attractive long term returns of 7–10%. However, stocks are volatile, and there are no fixed maturities at which you can expect capital repayment. Instead, shares are long term investments, with 10+ year time horizons recommended. Any long term investment portfolio should include a significant weighting of stocks — the exact weighting varying with an investor’s risk preference & goals.

While market timing is always hard, many investors view an economic slowdown as increasingly likely in the short-medium term. Continued expansion until July 2019 will mark the current expansion as the longest period of American economic expansion since records began. Many Investors shy of the risk of a slow down have shifted out of equities and into bonds.

Conclusion

Investors have to strike a balancing act between growing (even preserving), their nest egg and the risk of capital loss. Ultimately, with inflation above savings rates, most investors are likely to be best served by a balanced investment portfolio tailored to their time horizon and risk tolerance. Investors may need to spend some time working out exactly what their financial goals are and the best financial products to achieve them. Advice from an IFA or wealth manager may be suitable for those who are time poor. Regardless, spending some time to rid yourself of the restless feeling accompanied by inflation eroding your savings each month is a sound investment.


Find out more about investing with WiseAlpha. All factual information true at time of publish.

As with all investments your capital is at risk. WiseAlpha members purchase Notes which are fractions of individual corporate bonds.

See full Risk Statement.