Interactive Investor

Where to put your cash as rates keep falling

4th August 2016 13:48

Kyle Caldwell from interactive investor

Savings rates are already at record lows, and the bad news is that things are only going to get even worse, with the Bank of England today moving to cut interest rates to a record low of 0.25%.

The one saving grace is that inflation is at low levels, standing at 0.5% in June. According to data provider Moneyfacts, the vast majority - 593 - of the 770 savings accounts currently on the market can beat or match inflation.

But this is likely to be a temporary phenomenon. Various economists have predicted that over the next year or so inflation is likely to rear its head, a consequence of the pound's decline.

JPMorgan Asset Management, for example, has predicted that by the second half of next year inflation will be running at between 3 and 4%.

Consider the stockmarket

And while cash may seem safe in uncertain times, over the long term most cash accounts fail to protect your money from losing its real value as inflation picks up.

As a first port of call, cautiously run multi-asset funds are worth consideringThe spectre of inflation making a comeback, coupled with pitifully low savings rates, should in theory encourage risk-adverse savers to consider investing in the stockmarket, which offers the potential for higher returns.

But it is worth remembering that the stockmarket is no free lunch and can be pretty unforgiving at times, so is only suitable for savers who have a time horizon of several years and are prepared to put their capital at risk.

The predicament facing savers, when they make the leap from a cash ISA to a stocks and shares ISA, is where to start. For the novice investor there are thousands of investment funds to choose from, which can prove overwhelming.

As a first port of call, particularly for investors who do not want to take on too much stockmarket risk, cautiously run multi-asset funds are worth considering.

Multi-asset funds

Gavin Haynes, managing director of wealth manager Whitechurch Securities, says he would recommend Jupiter Distribution and Artemis Monthly Distribution for risk-averse savers making their first foray into the stockmarket.

"Distribution funds have a wide spread of different asset classes and come with global mandates, which helps keep a lid on volatility when stockmarkets are more unsettled," says Haynes.

Vanguard LifeStrategy 20% Equity, a tracker fund with low charges of 0.24% a year, is another that may fit the bill. This fund only has 20% in shares - the rest mainly tracks different bond indices.

The capital value of an income portfolio changes, but it pumps out a steady incomeFund Expert's Brian Dennehy favours M&G Episode Income as his multi-asset fund pick, but argues that cash savers making the move to the stockmarket should focus on income.

In that context, he says, UK income funds fit the bill; he names JO Hambro UK Equity Income as his favourite. The fund has grown its dividend nine times out of the past 10 years.

"Would-be investors need to adjust their mental approach away from an obsession with day-to-day moves of the capital value, to a greater focus on the lack of volatility and relative predictability of the income," says Dennehy.

"Think of the income portfolio like your heart pumping out blood - the heart continually changes shape as it pumps out a steady stream of blood. The capital value of your income portfolio will also vary from day to day, but there will be a steady flow of growing income."

Investment trust option

Investment trusts should also be on the shortlist. No fewer than 10 investment trusts boast records of over 40 years of dividend growth.

A further nine have clocked up between 20 and 40 years, and another 18 have between 10 and 20 years of year-on-year increases under their belts.

Earlier this year City of London Investment Trust, one of our sister magazine Money Observer's Rated Funds, became the first trust to reach the 50-year milestone.

Investors who buy and hold for 10 years have a 99.4% chance of making moneyThere are plenty of other starter investment contenders, including portfolios such as RIT Capital Partners, which have a genuine focus on protecting investors' capital in turbulent market conditions.

But in pursuit of obtaining potentially higher returns there are certain tactics that a risk adverse saver should utilise in order to reduce risk themselves. One of the main rules to follow is to invest for at least five years, or longer.

Research from Woodford Investment Management, which looked at the probability of making money from the UK stockmarket over different time-frames since 1965, hammered home the point.

It found that investors who buy and hold for 10 years had a 99.4% chance of making money. Over five years the percentage chance of success was 92.8%, over one year it was 82.1%, and over a one-month period the probability was 63.9%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.