Investing: Look beyond loss-making accounts to get most from your money

This month marks the fifth anniversary of the Bank of England lowering the base interest rate to the previously unheard of level of 0.5%, and it has stayed there ever since.

Most experts predict there is no prospect of a rise anytime soon. This has undoubtedly been good news for borrowers but savers have suffered, with returns dwindling to next-to-nothing.

Even though the UK’s official rate of inflation fell to the Bank’s target of 2% in December for the first time since late 2009, savers continue to lose money in real terms.

The bad news does not necessarily stop there. UK Government bonds, for so long seen as a safe haven, are widely predicted to perform poorly on the back of rising yields and the prospect of an end to quantitative easing in the US.

Income from bonds, although guaranteed, could potentially be more than wiped out by losses in capital value.

So what is the answer for those seeking a better return on their money? The first rule of financial planning is to set aside enough capital to cater for short-term needs. In other words, money that is likely to be used within five years should be held in cash, despite very low rates of interest.

Beware of any investments which promise good returns over short periods of time – if it sounds too good to be true, it almost certainly will be. Having allocated sufficient funds for the shorter term, your attention can then be concentrated on building an investment strategy for the longer term.

At the centre of this should be a highly-diversified investment portfolio incorporating a range of asset classes, including a proportion held in shares. In order to reduce risk, funds investing in many underlying stocks should be used so that the effect of one or two performing poorly is minimised.

Risk can be reduced further by using funds which track asset class returns, rather than ones that aim – but often fail – to beat their benchmark. This reduces costs and the chances of expensive mistakes being made by fund managers.

Do not focus solely on income producing funds but on the total return, including income and capital growth.

In the 2013/14 tax year every individual in the UK is entitled to tax-free capital gains of up to £10,900, meaning that even investments outside the tax-free ISA (individual savings account) regime can be highly tax efficient.

Over the longer-term, such a strategy is highly likely to produce returns that comfortably outperform inflation and, if required, produce an income far higher than that available from cash accounts.

Published in The Press and Journal on 10/03/2014