Where You Can Invest Your Money to Beat Inflation in 2017

It used to be easy to beat the rate of inflation.

Cash ISAs were priced competitively to bring more customers into banks, while bonds were seen as a low-risk alternative to cash holdings, with similar interest rates.

However, this is no longer the case.

Slow economic growth has forced the Bank of England to keep the base rate at an all-time-low of 0.25 per cent in an effort to stimulate the loan market.

Banks were quick to pass the rate cuts on to savers, with some high street brands offering returns as low as 0.01 per cent on instant cash ISAs.

Meanwhile, inflation hit 2.9 per cent in August 2017, and Bank of England Governor Mark Carney has predicted that it will rise to more than three per cent by the end of the year.

To put this in context, if you had invested £10,000 in Natwest’s 0.01 per cent Cash ISA in August 2016, it would have had a spending power of just £9,711 by August 2017.

Cash is no longer the safe haven that it used to be. In fact, by leaving your money in a cash savings account paying less than 2.9 per cent, you will be making a guaranteed loss.

In order to beat the rate of inflation, you need to diversify away from cash and look beyond the banks.

But unfortunately, these non-bank options are not protected under the Financial Services Compensation Scheme (FSCS) and tend to come with more a higher level of risk.

This means that you should always maintain a diversified portfolio which includes some cash holdings; and you should never invest any money that you can’t afford to lose.

Once you are comfortable with the risk involved, you can start looking at the few remaining places where you can invest your money to beat inflation.

  1. Stocks and Shares Investments

As a short-term investment, stocks and shares can be pretty nerve-wracking.

The stock market can be extremely unpredictable and volatile, and it can be impacted by any number of outside factors.

But over the long term, the major stock exchanges tend to deliver good returns. For instance, between 22 September 2007 and 22 September 2017, the FTSE 100 reached a low of 3,760.70 and a high of 7,586.45.

Yet if you had invested in a FTSE 100 tracking ETF or fund at the start of this period, you would have seen double digit returns by now.

If you are investing in stocks and shares, make sure you invest within an ISA wrapper, which will protect your returns, and be prepared to leave your money in there for at least a few years.

  1. Investing in Fixed Rate Bonds

Bonds have always been a popular safe haven for investors, but the latest government-backed bonds have offered sub-inflation returns.

For higher yields, investors have to look towards the world of corporate bonds instead, and unsecured mini-bonds in particular.

Up and coming companies use mini-bonds as a way of raising funds from individual sophisticated and high net-worth investors, offering fixed rates as high as 8.5 per cent.

However, it is vital that you are fully aware of the risks involved with each individual project before you invest in such a bond.

Some companies are more reliable (and solvent) than others, and higher returns are likely to reflect higher risk.

It’s also worth noting that most mini-bonds cannot be traded on an alternative marketplace, and are therefore not regulated by the FCA.

And unlike government bonds (gilt), which can be traded, you cannot release your capital before the bond matures.

  1. Alternative Finance and P2P Investments

The alternative finance sector has won a lot of new fans over the past couple of years, as frustrated investors search for new opportunities to make money.

Crowdfunding, peer to peer lending, and even hedge funds have seen an influx of retail investments, and the recently-launched Innovative Finance ISA (IFISA) has allowed some platforms to offer tax free returns of up to 12 per cent.

Like mini-bonds, alternative finance investments are not covered by the FSCS, but they are regulated closely by the FCA.

Nevertheless, it is important to be fully aware of the variations between each investment and each company before you invest.

  1. Investing in Hard Assets

Hard assets such as classic cars, fine wine, jewellery and art have been gradually increasing in value as cash ISAs and government bonds have declined.

In fact, the value of fine wine rose by a whopping 25 per cent last year while classic cars were up by 457 per cent between 2004 and 2016, as investors sought out tangible assets that will at least hold their aesthetic value, even if the prices drop.

The luxury markets always do well in times of austerity, but if these hard assets are damaged in any way, it can have a huge impact on their value.

Any valuables should always be fully insured, and stored according to the insurer’s instructions.

And if you do decide to take advantage of the booming wine market, just make sure you don’t ‘accidentally’ drink your profits.

 

Kathryn Gaw

Kathryn Gaw is a financial journalist based in Belfast, Northern Ireland. She has been writing about personal finance and investment trends for more than a decade, and her work has been featured in the Financial Times, City A.M., the Press Association, and The Irish Independent, among many other publications.

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