The Cash Conundrum

So you’re nervous about stockmarkets, think property prices are more likely to go down than up and fed up with getting next to no interest on your savings. If you’re fortunate enough to have some cash, what do you do with it?.

Well, if you’re in this boat you’re not alone. Although stockmarkets have started to bounce back this year, the storm clouds still loom, especially in the UK and US. And while property prices have been creeping up in some areas, they could struggle if the UK economy’s poor health persists.

Gold, often a salvation in times of gloom, is hitting all-time highs of around US$1,100 an ounce, so jumping in now risks buying at what might prove to be near the top of the market.

If you’re happy investing for 10 years or more then spreading money across a range of investments should stand you in reasonable stead. You may lose out short term if markets remain choppy over the next year or two, but if you can hang in there, there’s light at the end of tunnel.

However, if you’ll need the money sooner I’d generally be nervous about investing heavily right now. Trouble is, with the Bank of England Base Rate at just 0.5%, most savings accounts aren’t an enticing alternative.

There’s no magic answer, but there are some options worth a look:

Savings Accounts
With typical easy accounts paying just 0.17% a year (source: Bank of England) there seems little point in bothering. But look beyond this and you can find ‘best-buy’ savings accounts paying over 3% gross a year. They mostly include bonuses, so be prepared to move elsewhere down the line, but worthwhile nonetheless.

Fixed Interest Accounts
Even better, if you can tie up your cash up for at least 3 years you could enjoy an annual fixed rate of 4.5% gross or more.

NS&I Index-Linked Certificates
Not great right now given inflation (measured by the Retail Price Index) is negative. But if inflation does pick up again these could look pretty smart, especially for taxpayers.

Offset Mortgages
Appealing, as you can effectively enjoy tax-free interest on your cash equal to your mortgage interest rate. With variable rates currently around 3%, higher rate taxpayers could earn the equivalent of 5% gross a year. Because of charges and rates etc, they tend to be most worthwhile if you have cash equal to around 10% or more of your mortgage.

Corporate Bonds
Unlike the above options, investing in corporate bonds could lose you money. But with investment grade UK bonds yielding around 6% they’re catching investors’ attention. Low interest rates and inflation mean the current environment is as about as good as gets for bonds. But if either rises, the value of bonds will probably fall. So are bonds, like gold, maybe riding near the top of the market? Difficult to tell, but my gut feeling is more likely than not. Worth a dabble for the attractive yield, but don’t bet your shirt.

As always, investing is a gamble. If you like taking risk I’m sure you could probably find investments that’ll either make or lose you a fortune over the next year or two. But if you can’t afford to lose much, or potentially tie up your cash for a long time, then despite low interest rates I think cash is probably king for now.

Take a look around the site to find out more about the types of savings and investments mentioned above. You might also find our calculators useful.

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