It has been a few weeks now since the Bank of England cut the base rate to a record low 0.1%. This lower rate has already filtered through to saving accounts rates and to a lesser extent mortgage rates. The rate at which you can lend money to the Government by buying gilts has fallen to a record low, with the 5-year gilt yield at -0.06% at the time of writing. This means you have to pay the Government for the privilege of lending them money. All of this creates a situation where the “risk free return” available to investors is now virtually nonexistent. In fact, bearing in mind that inflation may well be higher than the rate available on your savings, those who want to avoid “real” assets are probably entering a period where they can expect no return, combined with the risk of inflation eroding away the real value of their savings. They can actually expect “return free risk”.
Understandably many savers are deeply unhappy at the position they find themselves in. However, we are taught that the return you receive on your money is the reward you get for taking risk with it. Does it therefore follow that without risk there should be no return? Before the creation of the Financial Services Compensation Scheme (FSCS) depositors could lose their savings if a bank became insolvent. Now savers are protected on deposits up to £85,000 is it any wonder these same deposits pay no interest?
In any event, complaining about the situation is not going to change it. Choosing an account offering the highest available interest rate with one of the FSCS protected institutions is sensible and a risk-free way of increasing your return but does not get away from the problem of universally low interest rates. This leaves investors with two choices. They can accept that they will only get back the nominal value of their savings but suffer a virtually guaranteed loss on their real value. Alternatively, they can choose to invest in a portfolio of real assets, such as shares, property and bonds, which gives the potential of higher returns but of course comes with the compromise of investment risk.