What do you do about saving these days?
As regular readers will know, we are looking to build an investment portfolio and are therefore becoming interested in the science and practice of storing money – that is, investing. So let me dream for a little, imagine that we have already amassed a stash and want to put it away safely and securely. While there are all sorts of esoteric investment opportunities around, I want to consider the more traditional and trusted approaches and ask the question: ‘Just where should we store our hard-earned loot and in what currency? ‘.
It is the most unfortunate time to do this with such low interest rates. Funding for Lending, where the Bank of England injects money into the real economy, hasn’t really worked as recent mortgage lending figures show. Now there is talk of negative interest rates to force banks to lend to the (more risky) business and consumer. That may be fine for the businesses but think what that will do for savings rates.
The problem is particularly acute for people who have saved all their lives and now want to store their money somewhere safe. That will be a problem that we would like to have of course but it is a serious problem for people who were, until recent events, expecting to get 5% or so on their savings. The difference between an expected income for 5% and 1% is – er – a factor of 5!
Would you enjoy your income reducing by such an amount? It really isn’t funny. If you have worked hard and managed to save half a milion pounds (or realised it from the sale of a business or house) which would have yielded a comfortable cushion of £25,000 a year or more pre-crash, and you discover that the same money now yields only £5,000, this is serious poverty. It is also very depressing at a time when people are hoping to relax in their retirement, particularly as having that cash would preclude a lot of benefits to which people may be entitled on the consequent income.
But with the globalisation of finance, the world is really our oyster. Do not be frightened of using offshore banking – it is in the UK’s DNA of course! Assume for the moment that we had our famous stash and we want to put it away for up to 5 years that is safe and that offers a real return. One way to do this would be to invest in fixed rate bonds offshore. Of course it is important to realise that having bought the bond, we can’t withdraw any of it before the term has ended, which may be a year or 5 years. The longer we commit the money for, the higher interest rate we can achieve so we won’t put our rainy-day money there- these funds are certainly not liquid!
Then, as we will almost certainly be investing overseas, we will need to be able to move money from one currency to another which really means using an international bank that understands the issues. Or we can have proper accounts in multiple currencies, same solution.
The UK economy remains sluggish and we are threatened with yet another official recession – which would make this recession the longest in memory. More quantitative easing is likely to happen and it is inevitable that sterling will depreciate a little – or a lot. Japan has adopted the same policy in order to kick-start theJapanese economy after more than 20 sluggish years. I am not convinced that the worst is over in the Eurozone – all may be quiet at the moment but there are major problems ahead. Like Nero, the ECB fiddles while the Euro burns, or at least is smouldering – see what happened in Italy last week. And the Federal Reserve has clearly stated that it won’t worry about inflation until unemployment in the US reduces (which seems an amazingly sensible policy). So it’s a race to the bottom and being able to move money from one currency to another by international currency transfer becomes very important.
Don’t we live in interesting times?