The value of investments and any income from them can fall and you may get back less than you invested.

Ten years of low interest rates

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It has been ten years since the Bank of England cut interest rates to a record low. On March 5, 2009, amid the financial crisis, the Bank’s rate-setting Monetary Policy Committee dropped interest rates to 0.5%.

The move helped to prop up the economy, but as interest rates paid on cash accounts tumbled savers have been forced to pay a heavy price.

A damaging decade for savers

A saver who put £100 in a cash savings account at the end of February 2009 will have earned just £5.43 in interest, according to new Brewin Dolphin research[1]. Even worse, when inflation is factored in, that £100 would be worth just £83.65 in real terms. In other words, many savers are poorer after inflation than they were a decade ago.

Before this damaging decade, the common assumption was that savings accounts and cash Isas would deliver decent, if unremarkable, rates of return. Bank of England interest rates averaged 4.7% in the previous decade from the end of February 1999 to February 2009. Savings of £100 would have earned £62.74 in interest and still be worth £135.94 after inflation.

Sarah Kirby, investment manager at Brewin Dolphin, said: “Pre-crisis, cash was king for savers when interest rates were higher, and savings could at least beat inflation. The decade of erosion that started in 2009 has meant savers have suffered losing money in real terms as inflation has severely eaten away at their cash.”

Positive for shares

Low interest rates had the opposite effect on the stock market as more people turned to shares in search of income and low interest rates helped to stimulate economic growth

Of course, past performance is not a guide to future performance. But if you had invested £100 in the FTSE 250 stock market index ten years ago, that would have grown to £314 in real terms[2].

Stock-market investing is not for everyone as your money can fluctuate in value and it can be a bumpy ride, but stocks would have proven to be a more profitable home for your money over the past 10 years. If you can take a longer-term perspective, there are also ways to mitigate the risk and make the process less stressful.

Chief among these is diversification, which means spreading your money across different stocks, shares, funds, industrial sectors and geographical regions. 

“Although a more volatile ride for investors, particularly with the global financial crisis just over 10 years ago, equities have performed better than cash,” says Kirby. “Whilst there is always a risk in putting your money into shares diversifying your portfolio reduces the risk.”

At Brewin Dolphin, we can structure a diversified portfolio tailored to meet your longer-term financial goals and attitude to risk. 

  

Past performance is not a guide to future performance. 

The value of investments and any income from them can fall and you may get back less than you invested. 

No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us. 

Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change.  Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser. 

The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.



[1] Interest rate used is one-month LIBOR. Real returns include inflation (CPI) to 28 February 2019

 

[2] FTSE250 total return dividends re-invested including 0.5% fees from February 2009 to February 2019 with no advice. Fees vary by investment provider and will impact your returns. Real returns are reduced by CPI to 28 February 2019

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