Where should I put my money?

Recession-proof your portfolio

The big question that all savers and investors are asking during this period of economic downturn and low interest rates is: ‘Where should I put my money?’

High street banks and building societies, struggling to raise funds on international money markets, are offering ever-more attractive rates in a bid to attract ordinary savers. Those who have kept their money in the bank have seen the best returns in recent years, with cash outperforming both property and equities over the past 12 months.

But on the other hand, banks no longer seem the secure bastions they once were, although savers should, if possible, keep a sense of perspective. In this economic climate it certainly pays to err on the side of caution, but this does not mean withdrawing funds from the banks completely.

Those who want to take a more cautious approach should ensure that no more than £35,000 is deposited in any one institution. This is the amount protected under the Financial Services Compensation Scheme (FSCS), and is the total amount protected across any one banking group. To further complicate matters, some groups have kept a separate banking licence for each of their subsidiaries.

It is also worth noting that these limits apply to each individual person, not per account. So if you have a joint savings account, up to £70,000 is covered under the FSCS if two names appear on the account.

Make sure you are not holding your money in accounts paying a low rate of interest, as your actual return after the effects of inflation could be negative. Don’t neglect to utilise your Cash Individual Savings Account allowance. Consider, too, Index-linked certificates from National Savings & Investment, which guarantee to beat the Retail Prices Index over either three or five years, free of tax; however, your money is tied up for the term of the certificate. If you have sufficient emergency cash savings, government gilts are another lower risk option.
By taking a longer-term view of at least five to ten years, you may wish to consider investing in equities. Much of this will depend on your attitude towards risk for return. No-one can predict how long this current turmoil will go on for, or how low markets will continue to fall. Investing in equities has historically been a good long-term hedge against inflation, particularly when the shares delivered a growing dividend stream. It’s worth remembering that dividend income can equate to a significant share of total returns.

In five years time, if you believe things will be better, then it probably makes sense not to get out of the stock market completely. However, in the medium-term, it’s worth bracing yourself for more turbulence during this interim period. Also, it is crucial to keep a disciplined approach to investing and not to forget your long-term goals. Now would be a prudent time to review your current holdings to ensure that you have a balanced portfolio that matches your risk profile.

If you have regular savings plans, whether these are monthly contributions payable into Individual Savings Accounts or pensions, don’t be unduly worried. Even during this period of market turbulence, putting money into the market at regular intervals means that you benefit from buying shares or units of funds at lower prices than when markets were higher. Effectively this means your savings plan or pension is better value for money today. And this should put you in a good position to benefit from future upturns.

The situation could be somewhat different if you are within five years of your retirement. You may not have sufficient time to see your investments recover in value. During this period in the run-up to your retirement, it makes sense to reduce your risk and stock market exposure. If you haven’t already done so, you could consider switching to cash funds, or to gilt or corporate bond funds, for the last few years.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.