"Risk-free tends to mean return-free, these days"by Andy Davis / January 21, 2016 / Leave a comment
Published in February 2016 issue of Prospect Magazine
We British are apparently among the world’s worst savers. According to the Organisation for Economic Co-operation and Development, the British household savings rate is one of the lowest of the countries the organisation tracks, far behind everyone in Europe except Greece, Denmark and Portugal and also well below the United States, supposedly the world’s “consumer of last resort.” Our own Office for National Statistics reported this year that the UK savings rate is now 4.9 per cent, back within a whisker of the low it reached just before the financial crisis.
That’s hardly surprising, considering that wages for most people have gone nowhere for years and the rewards you can expect for putting money on deposit are all but invisible. Why bother when you’ll be lucky to get 1.25 per cent interest? Arguably, it is official policy to persuade people not to save—spending and borrowing are the prescription to perk up our economy.
This is all well and good but sometimes saving is the only option. If, like us, you can see the time when children will need a chunk of money to help pay for university or training, the only approach is to save some cash.
But where? Today’s interest rates make saving a slog: more like running uphill than jogging down with a helpful wind at your back. Now that we are embarking on this exercise for ourselves, I’ve been thinking more about how to approach it and alongside a deposit account I plan to put some of the money into shares in a number of investment trusts that have started appearing on the stock market. These lend money via online peer-to-peer (P2P) platforms that are mainly based in the UK and the US and offer typical yields in the 6-8 per cent range.
Returns this high do not come without risks, of course, and many others will prefer to keep to safer waters. The share prices of these trusts can fluctuate above and below the nominal value of the basket of loans they hold. Buying when they are trading above their “net asset value” is obviously more risky. Similarly, it is likely that a lot more shares in trusts like these will be offered in the coming years, which could depress prices if demand is weak. Plus, of course, the whole area of P2P lending has yet to be tested in crisis conditions, during which the shares could become difficult to sell, at least temporarily.
These are all solid arguments for caution, quite apart from the practical problem that dealing costs will eat into returns. On the plus side, however, these trusts offer an easy way to diversify across a large number of loans to different types of borrower, and can be held in a stocks and shares ISA.
They are far from risk-free, but risk-free these days tends to mean return-free as well. As investors, we have to bear a higher degree of risk than was necessary a few years ago. It’s an inconvenient fact of life, but a fact nonetheless. For me, the risks are acceptable given that the first of four calls on the money won’t be until 2023 and we will average out the price of our purchases over the next decade and a half.
But it is a pretty complicated way of saving up some money for your offspring. Sadly, saving has become much harder since the crisis: small wonder that we seem to struggle with it.