High interest rates might make cash products tempting – but they’re not without risk.
Rising rates for cash and deposits
There is a risk of missing out on any future market rises
Rising rates affects more than cash deposits
Investors should always have an eye on the medium to longer term
INTEREST-EARNING ACCOUNTS
Such as savings accounts and certificates of deposit, offer safety, predictability and liquidity. But they tend to yield lower long-term gains. The interest rates offered by banks, even if they seem high, may struggle to keep pace with inflation, potentially eroding the real value of money over time. And fixed-term accounts can come unstuck at the end of the locked-in period, when the investor will have to make a quick decision on where to reinvest.
If you can’t stay the whole term, early withdrawal penalties in an emergency can also eat into the principle accrued. Depending on your tax bracket and the prevailing tax laws, you might have to pay taxes on the interest income, reducing your overall returns. And if you rely on means-tested benefits, holding funds in a fixed-term deposit could affect your eligibility.
GOVERNMENT BONDS
Government Bonds are considered low-risk investments as they are backed by the UK government. These fixed-income securities offer regular interest payments and return of principal upon maturity. Though they are relatively stable, the returns are generally lower compared to stocks and shares over the medium to longer-term making them less suitable for those seeking higher long-term growth.
There are also Bonds (loans) made to other Governments outside the UK and whilst German Bonds can be thought of as more secure, Argentinian Bonds are very likely to suffer a default if history has anything to say!
CORPORATE BONDS
EQUITIES
Corporate Bonds are also fixed-income securities, but they are issued by businesses to raise capital. Corporate bonds often provide higher yields than government bonds due to the additional risk associated with companies. However, the risk of default by the issuing company can affect the reliability of returns, making them less secure than cash-based investments.
The UK stock market has historically outperformed cash-based investments and bonds over extended periods. Of course, equities are more volatile and carry a higher level of risk, particularly in the short term. Investors must be prepared to weather market fluctuations and be in it for the long haul to reap the benefits of capital appreciation and dividends.
A diversified portfolio for long-term investors will always be the key. Poor performance in one area can be balanced in another. Around 60 per cent equities and 40 per cent cash-based is an average split for portfolios with a medium level of investment risk – but by no means the only way. Diversifying across international markets can be another way to balance out any turmoil. As experienced Independent Financial Advisors we continue to assess this by looking at your all-important individual attitude to risk. Try and view your portfolio as the broadest range of opportunities for growth, and cushions for loss. And as we always like to say – please don’t check it every day!
