Lessons from the UK: investing in a low-rate environment
Spare a thought for investors in the United Kingdom: since the June 2016 referendum that set Brexit in motion, the investment environment has been one of near-constant turmoil.
Faced with low interest rates and an uncertain economic future, investors in the UK have had to be sophisticated in devising ways to keep earning.
How savvy UK investors beat the odds
As the British economy has slowed, the Bank of England has held fast to its policy of imposing low interest rates in a bid to stimulate growth (sound familiar?).
The UK's national cash rate was reduced to 0.5% following the 2008 global financial crisis, got to as low as 0.25% in August 2016 and recovered to 0.75% in August 2018, where it has remained.
As of October 1, this is the same cash rate Australians now face. How have British people managed investing since they faced that precise challenge? Here are three strategies that appear to have worked.
1. Avoid storing large amounts of cash in a savings account
It bears repeating to anyone who will listen: when the cash rate is below the inflation rate, as it is in both Australia and the UK, any money in a traditional savings account is likely to diminish (in inflation adjusted terms).
So, while savings accounts are important tools to protect your nest egg, it's not enough to rely on traditional bank products if you want to grow wealth.
2. Lower interest rates can benefit the stock market
Interest rate cuts can reduce financial pressure on homeowners who may in turn spend more and stimulate the economy.
This appears the case with the UK share market, which, despite some short-term losses, has been relatively stable over the past five years: for example, within a month of the Brexit decision, the FTSE 100 (a share index of the 100 largest companies listed on the London Stock Exchange) had returned to pre-referendum levels.
Indeed, over the past five years, it has trended upwards, even in the face of stagnant interest rates.
Australian investors would do well to take heed of the experiences of their British counterparts. Australia's low interest rates make traditional savings accounts a slow option to grow wealth.
But there's two caveats Australian investors should note. First, there may be a lag before these returns materialise (not helpful for investors with a shorter timeframe) and second, factors beyond monetary policy shape the ASX's fate (like US-China trade wars).
The ASX has performed relatively well over the past five years, particularly if one focuses on diversified index funds like the S&P/ASX 300. The takeaway? As long as you approach the stock market as one aspect of a diversified portfolio, it may provide a sensible way to invest and keep earning.
3. Explore fixed-income investments such as peer-to-peer loans
Faced with the volatility of conventional assets, UK investors have increasingly sought alternative ways to keep earning without sacrificing stability in their portfolios.
The early 2010s saw significant growth in peer-to-peer (P2P) lending, which are investment platforms that allow investors to invest directly in the historically resilient asset class of consumer credit.
P2P operators can offer a relatively stable investment with fixed income returns that can be far higher than the cash rate. This value has allowed the industry to flourish in the UK over the past decade, expanding 20% in 2018.
The success of P2P lending in the UK is now being replicated in Australia. Companies founded in Britain, such as RateSetter, have found a receptive market of investors keen to take advantage of attractive rates, stable cash returns and transparent business practices.
Having arrived in Australia in 2014, RateSetter, for example, has already surpassed more than $600 million in loans funded and continues to help investors protect and grow their wealth, despite Australia's low-rate environment.
Keep calm and keep earning
It shouldn't surprise that the lessons you can take away from the experience of investors in Britain, read like the basics of investment practices: ensure you are earning more than inflation to protect your principal, diversify your portfolio, embrace new opportunities (like P2P loans), and keep earning even as the going gets tough.
RateSetter is Australia's largest peer-to-peer lender, that allows you to earn attractive returns of up to 8% by investing in a portfolio of consumer loans. To start investing with RateSetter you can register here.