With UK inflation over 5%, your spending power halves every 15 years.
So, for example, if you want to retire in 15 years, and leave £10,000 in a current account with little or no interest, it will be worth the equivalent of £5,000 in about 15 years time.
If you retire today and this is your nest egg for emergencies in the future like a new boiler or car, then the problem is arguably worse.
Whether it’s your life savings, pension drawdown, a bonus or an inheritance, how can you invest the money safely, so that in 15 years time it is worth more, not less?
Lets look at three investment options:
- Property
- Bonds
- Shares (or equities)
What about property investment?
Bricks and mortar can feel safe, but becoming a buy-to-let landlord is not without risk.
Your choice of property, location and purchase price can determine whether renting out property becomes a nightmare or dream come true.
With less than £50,000 your options are limited to buying smaller property in lower value areas. If you live in the South East this means becoming a long-distance landlord, and you will incur costs like letting agents.
As an example, if you buy the right one bedroom flat in Middlesbrough for £50,000, you can yield £400 a month in gross income. If you successfully let the property 23 months in 24 (when one tenant moves out at the end of a year, there is usually a month gap before a new one moves in) your yield is 9% before costs.
You will incur decorating, maintenance and letting agent fees. You also need to be properly insured and should consider setting up a company, and buying the property through that, to give yourself protection; if a tenant or visitor sues you for some reason and your landlord insurer won’t cover it, you don’t want to be personally liable.
What about buying Bonds?
There are different types of bond; government back bonds (also called Gilts) and corporate bonds. Within corporate bonds, there are a range of ‘investment grade’ or ‘quality’ companies, but there are also ‘junk bonds’.
So while bonds are thought of as very safe, the corporate bonds all carry varying degrees of risk, just like shares do. If you are looking for safety over growth, then a carefully selected fund of globally diversified Government bonds may be the way to go.
When selecting a fund, you need to ensure that you understand if it is investing solely in Bonds, and avoid funds buying a lot of derivatives or other ‘clever’ financial instruments that actually carry a lot of risk for the end investor.
A good portfolio of Bonds can generate up to 7% return a year (based on the last 5 years performance). So pure bond investments can be a safe way to defend your savings against inflation.
What about investing in shares?
If 5 years ago you had invested in a professionally designed, globally diversified portfolio of funds that in turn re-invested in the world’s best companies, you could have earned an average return of 18% per annum.
One of the five years would have returned just 6% but two would have returned over 25%.
The returns are clearly better than bonds or property. If inflation rises further, then shares may be the only way to protect against inflation for some people.
