I have been left £20,000 what shall I Invest in?

Where to invest your money

Nicholas Ward – Senior gold consultant

“I have been left £20,000 and don’t know where to invest it. I want to safeguard my children’s future with a U.K. investment with minimal risk but with growth potential”. This is a common question clients ask daily at The Pure Gold Company, understandably given the many different investments that are now available.

Last week we spoke to 35-year-old English teacher Marie who had received an inheritance from her aunt of £20,000. She wanted to safeguard the future of her two daughters and was considering various investment options including bank deposit, bonds, equities, cryptocurrencies and gold. We look at all the options we discussed and why gold trumps them all.

The status quo – cash in the bank

People with savings rather than debt hope the Bank of England will continue to hike interest rates (after its latest iteration to 0.75% in August) following years of record low rates.

This would give Marie the opportunity to see a modest return on her deposits and as she is new to investing, would mean she didn’t have to actively navigate the increasingly complex investment landscape for a suitable product.

However, high street banks have refused to pass on most of the increases to their savers following the last two hikes. For example, even when the Bank of England hiked rates last November it only resulted in a 0.07% rise across the U.K. high street on easy access accounts. This amounts to an unimpressive average bank interest rate of 0.59%.

Banks largely failed to pass on the August rise and will probably hold back on any future rate hikes. Nationwide Building Society expressly stated they were not passing on that hike in full to savers, offering their customers a paltry 0.1% increase.

Meanwhile, even if the most recent 0.25% increase had been passed on, rates would have to increase tenfold to reach anywhere near a rate that kept place with the official inflation rate of 2.4%. The real rate of course is considerably higher than that at 3.5%. If a Brexit deal can’t be reached (which looks increasingly likely at the time of writing) the cost of exports will go up even after sterling’s fall and cause inflation to surge further.

What about the rise of challenger banks?

The highest savings interest rate offered is currently with Goldman Sachs’ much vaunted easy access account Marcus recently launched in the U.K. This is still only a maximum of 1.5% however, and the rate is variable, so Marcus will have the right to shave it at any time, irrespective of what happens to Bank base rate. The only guarantee is a one-year 0.15 per cent bonus, and Marcus is only an online account so won’t appeal to anyone who wants to go into a branch for certain services.

Is the ISA a safe bet?

As it stands, no fixed-rate cash ISA accounts currently beat inflation; the highest is 2.25 per cent from Halifax. To even get this close to inflation you have to tie your investment up for 5 years.

Marie’s investment would therefore be worth £22,379.09 or 689.54 per child, which is unlikely to beat inflation in the period (although it does depend on the inflation rate in those five years). It’s impossible to predict inflation and interest rates accurately over this lengthy period.

Traditional or challenger alike, bank deposit rates are all still dwarfed by inflation, and the outlook for inflation is very unclear.

Leaving money in the bank is simply not a viable option for UK savers as investments would deteriorate in a handful of years as purchasing power becomes worth less.

To put it into perspective the cost of good and services have increased by 63.48% compared to 2000. On average during the last 18 years, inflation was 2.77% a year. The goods and services that she could have purchased in 2000 for £22,379.09 would now cost her £32,696. Unfortunately – if Marie would have left her money in the bank since 2000 it would only be worth £23,922.94. She wouldn’t be able to afford over 30% of the goods or services she could have purchased in 2000.

If Marie had invested in gold in 2000 however, it would have gone up by 400% in the same period reflecting more than a 22.22% per annum increase or £100,000.00.

Are bonds a safe bet?

Bonds have long been seen as safe profitable investments, but in the current climate, these historical realities no longer hold true.

The main difference between gold and bonds is the interest paid on bonds and the absence of interest on gold. But in the case of bonds, the interest isn’t likely to cover inflation and will result in a loss of purchasing power.

Let’s consider what Marie earn from a UK 30-year gilt. The total interest on a £20,000 investment at current yields of 1.96% would return her £35,990.40.

Real returns adjusted for inflation are therefore negative with a 30-year gilt guaranteeing a loss in purchasing power.

Gilt (or government bond) yields are near historic lows in Britain, and uncertainty over Brexit is continuing to cast a shadow over the economy. If the UK crashes out of the EU it will not fill the Bank of England with confidence to increase interest rates any further.

Despite gilts being issued by the UK government, they still come with some counterparty risk. The UK national debt is a substantial £1.8 trillion and continues to creep up. Currently, just over 35% of UK national debt is owed to foreign investors who we rely on to keep the country afloat. If they sell up, and the government defaults, Marie will effectively lose her entire investment. This may sound like an unlikely occurrence, but a lot can happen in 30 years…

Gold will not only provide Marie’s with her aim of “safe money”, but also offer her the possibility of a substantial profit with a zero risk of default. Looking at gold over a longer term to compare them more directly with gilts, gold has risen by 8% year on year compounded since 1971.

The Cryptocurrency Bandwagon

It would appear those contemplating entering the cryptocurrency market are a bit late to the game – or what’s left of it. There have been many overnight success stories in the past few years as the currency has risen meteorically, but a commensurate number of devastating losses as the currency has plummeted again.

Bitcoin is largely seen as the standard-bearer of cryptocurrencies, but it is extremely volatile. Bitcoin dropped by more than 20% in a few days last week to around $6,200. And over its first six years of trading the currency fell more than 10% in a single day dozens of times. It tends to draw speculators and gamblers rather than buy-and-hold-minded investors like Marie whose main concern is wealth preservation.

If Marie had invested the £20,000 at the pinnacle of Bitcoins hype in December last year, as so many did, it would now be worth £6,000. That’s a fall of 70%. In January this year, The Pure Gold Company was inundated with  enquiries from investors asking how they could cash out of cryptocurrencies and buy gold?  This stampede mentality is something Marie wants to avoid, as are the altcoins and scams that pop up in the industry. Each week someone mentions they know someone that has lost their entire investment to what effectively amounts to a Ponzi scheme.

In contrast to the highs and lows of cryptocurrency, gold can be quite boring. Most keep it as a hedge in their portfolio, forgetting about it and almost hoping that it doesn’t rocket in value – as it’s usually a sign the rest of their portfolio is collapsing. But don’t mistake gold’s often-low volatility for a non-performing asset. When economic and geopolitical conditions deteriorate gold can be volatile when it needs to be. Not only does it step up and shield investors from losses, but between 2007 and 2011 the price increased by over 300%.

For Marie, another key advantage of investing in gold are the tax advantages. As a UK resident – Marie qualifies and benefits for “Tax Free Gold” which means that she is able to enjoy tax free growth (much like an ISA but with no restriction). Unfortunately this tax advantage does not exist for any of the options.

There is only a finite amount of gold in the entire world (171,000 metric tons) which is why it has retained its value so far and will continue to maintain that value in the future. By contrast, cryptocurrency provides nothing but excitement – whether good or bad, but not exactly what Marie had in mind for a legacy.

Bursting the Equity Bubble

Many experts on both sides of the pond believe global debt will likely be the next cause of a market crash. Global debt is now $247 trillion, nearly 2½ times the size of the global economy.

U.S stocks are seen to be overvalued due to the influx of cheap money in the economy which has artificially inflated prices. The U.S. stock market is now 140% the size of its economy – it should normally be 60%!!!

The S & P 500 is on the longest bull run in history and if history is anything to go by, it’s only a matter of time until this bubble bursts sending global markets collapsing. If, as market commentators believe, the US market falters, it will cause a sizable knock-on effect throughout the world.

The last stock market selloff in the crash of 2008 saw gold rise over 25% and up to 2012 we saw another 300% increase. Now gold can go down as well as up but even if we do see gold drop in value as it’s tangible, physical and has an intrinsic value it’s value will never drop to zero.  Whereas shares can go to zero overnight if the issuer goes bust. The slump in the value of W.H. Smith shares and the ongoing fraud claims at Patisserie Valerie are recent sober reminders that things can go wrong quickly and unexpectedly. For someone like Marie, she needs the financial reassurance that only physical gold can bring in order to safeguard her children’s future and financial legacy.

Where to invest your money

"I have been left £20,000 and don’t know where to invest it. I want to safeguard my children’s future with a U.K. investment with minimal risk but with growth potential”

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