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Savers desperate to earn more on their cash may wonder where to turn. Particularly with rates expected to slump further to shore up the economy.
Yet piling into the stock market may seem risky during an uncertain economic climate.
However, there are investments that offer the potential for superior returns without being entirely subject to market fluctuations. Here we consider your options, and how to take a successful approach to low-risk investing.
Dividends from shares
The returns from shares are typically more appealing than savings accounts, and provide the potential for capital growth if the stock market rises.
Dividend payments make up a significant chunk of the total return from shares. These are a slice of company profits paid to shareholders. Typically, they are paid annually, but sometimes come half-yearly or quarterly.
The highest dividends tend to be from the likes of utility companies, including renewable energy companies. These have strong balance sheets to guard against any turbulence in the economy.
Several companies pay hefty dividends of around 5%, far higher than standard savings accounts rates. A quick search online of household names will reveal plenty you can invest in.
But beware that dividends can be cut at any time as companies seek to preserve profits. So pick a sector that is expected to grow and survive if the economy suffers. This way you’ll have some certainty of income over time and help to reduce the risks you face.
Equity income funds
If picking individual shares feels too risky, you could opt for “pooled funds” such as unit trusts.
Equity income funds build portfolios of 30 or 40 dividend-paying stocks and can deliver capital growth on top. They are diversified, so that if one company suffers a setback this won’t decimate your returns.
You could buy a balanced, low-risk portfolio with just one fund. However, diversifying to reduce relying on one fund manager’s skill is probably wise.
A hefty chunk of FTSE 100-listed stocks have international exposure. So performance doesn’t rely on the UK economy. You can also pick from a growing number of funds that aim for around 4% income from shares overseas, such as Asia.
To some savers, equities will always be considered high risk. That’s why you need to think carefully about the risk you’re willing to take with your money But if you have time to ride out any volatility they [can be] lower-risk options in the longer term.
Bonds, or fixed-interest investments, are ‘IOUs’ issued by companies or governments seeking to raise funds. Investors are simply lending money for a set period. During this time, the bond issuer pays interest and when the term is up, the loan should be fully repaid.
Corporate bonds can be bought through a stock broker or direct from the company itself. Minimum investments can be as little as £100, and you can access cash during the term by selling the bond. But you will get the market value, which may be more or less your original investment. Remember the value of you investment can go down as well as up.
However, bonds issued by the UK government are typically viewed as one of the safest investments out there. The risk is that the bond issuer goes bust, and defaults on the loan. But the risk of this is considered exceptionally unlikely if a government issues the bond.
These investments are a useful part of a portfolio, being considered a safer option than shares. You could alternatively buy a bond fund, which will spread the risk and a fund manager will do the work for you – for a fee.
Remember to diversify
Whatever investment you choose, remember that successful long-term savings plans need to strike a balance. It’s best to have a mix of shares, bonds, cash and other investments if you’ve the money to spare.
You can protect yourself for sudden stock market slumps by investing across different types of assets, regions and sectors. Some assets may still do well while other parts of your portfolio struggle. However, the spread depends on your attitude to risk, age and goals.
Typically, investors hold a higher weighting in shares when they start investing, moving towards bonds once they are closer to retirement or their goal. So the balance gradually shifts to lower-risk.
A long-term view
Plunging into any form of investment in the hope of swift gains is a dangerous approach. Investing is a long-term game and carries risks. A longer period provides time to recover any losses, and you benefit from growth and compounding where your returns are reinvested.
If an investment suffers poor performance, check the reasons for this. But avoid chopping and changing every time you see losses, as fees may eat into returns.
Regular investing, reinvesting dividends and checking your portfolio once a year is a useful recipe for minimising any losses.
Take your time
Savers moving from cash deposit accounts to investing in the market should do so slowly. You need to consider your financial goals, and attitude to risk before picking the right investment for you.
Remember that you don’t need to pile a lump sum into any investment. Regular saving reduces the risk of bad timing or investing heavily before markets fall. There is nothing wrong with dripping money into a fund or investment over, say, a six-month period.
Hold some cash
It’s wise to hold around three months’ worth of cash in a savings account as a rainy day fund. This is important for investors taking a low-risk strategy, and particularly during uncertain economic times.
You expose yourself to inflation if your savings don’t keep up with the rising price of goods. There’s also the risk of low rates producing tiny returns. But you always need some cash set aside, as even investments considered minimal risk can lose money.
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Money Means is a news and information series written by independent financial and consumer journalists and experts. FSCS launched Money Means in 2016 to help give people clear and useful information about personal finance, to increase their understanding and confidence when dealing with money.