At the same time as the Office for National Statistics (ONS) estimates that households have accumulated more than £200 billion in excess savings since the beginning of the Coronavirus pandemic, inflation is far outstripping the rock-bottom interest rates on savings accounts.
With a tax-free, instant-access Cash ISA offering a high of just 0.54% at present – whilst the Consumer Price Index shows inflation at 2.1% for the 12 months up to May 2021 – the rising cost of living could be eroding those savings.
Because of this, experienced investors looking for the potential to grow any excess funds – instead of seeing their value decrease in real terms – could find now is a crucial time to revisit and rebalance their investment portfolios.
Relabancing allows investors to re-evaluate the weighting of their portfolio at present, making changes where needed to align closer with new or altered preferences, goals or timeframes.
A surplus of cash savings can offer investors opportunities to be more flexible and, where appropriate for their risk appetite, take on more risk – for example, investing in more long-term or high-risk assets if it is capital that won’t be needed in the short-term and that the investor can afford to lose.
On the other hand, an investor with a portfolio weighted more towards high-risk assets could use the extra capital to mitigate this risk to some extent – whether that results in keeping it as cash, but utilising the ISA wrapper to maximise returns as much as possible, or investing into low-risk options such as Government bonds.
A surplus of cash could allow investors to look at recent well-performing investment opportunities
With a volatile equities market seeing losses on par with those witnessed during the 2008 financial crisis and interest rates on savings accounts hitting an all-time-low, it’s clear that the investment landscape has been turbulent over the past 18 months.
But from well-performing supermarket stocks through to a booming housing market, some sectors and assets have proven themselves to be more resilient than others.
It could be an appropriate time for experienced investors to consider utilising vehicles such as the tax-free Innovative Finance ISA (IFISA) to gain exposure to alternative assets – those that aren’t correlated with stock market fluctuations or changes to the Bank of England’s base rate that caused cash interest rates to plummet.
Through investing surplus cash via an IFISA, experienced investors have the potential to earn inflation-beating, tax-free returns that are often higher than those offered on mainstream investments.
Whilst doing so, this also results in opportunities to increase the ESG weighting of their portfolio, supporting environmental projects such as the development of green energy, or back high-growth British startups with SME loans.
And for experienced investors looking to take advantage of the housing market’s staggering demand post-lockdown – which is expected to continue – property bonds could be an attractive consideration.
With tax-free target returns of between 4% and 8% on offer when investing via the IFISA, aiding small and medium-sized housebuilders in providing much-needed homes to tackle the UK’s housing shortage through property bonds has the potential to be both lucrative and impact-driven.
Take advice and conduct due diligence before deciding what to do with excess savings
Wherever you intend to invest these excess savings, taking advice from independent financial advisors (IFA) and conducting due diligence beforehand is as crucial as ever – even for experienced investors with countless investments under their belt.
Regardless of the amount of times a person has made an investment, having confidence in each one requires an in-depth understanding of its specifics.
Speaking to an IFA is critical for assessing risk appetite based on personal circumstances and goals, because not all investments are suitable for all investors. But on top of this, digging deep into the features of an investment is imperative.
The method for this will depend on the asset. For example, if investing into a property bond, take time to gain an insight into the provider’s track-record and expertise. Ask to see case studies, bond documents such as an Information Memorandum and discuss their processes for risk mitigation and originating and screening lending opportunities.
If investing into the equities market, look at the historical data of funds – but remember, past performance is not a guarantee of future success – or the teams at the helm of the companies you’re purchasing shares in.
And in addition to thorough due diligence and ensuring you are not taking on more risk than is appropriate, it’s also important to select an investment that meets specific preferences, timeframes and goals.
For those comfortable with having funds invested long-term with no set return date, stocks and shares are an important consideration. On the other hand, for experienced investors looking for a short or medium-term investment with a specified date of maturity, fixed-term bonds could be a better option.
Rebalancing your investment portfolio
With spending cut dramatically throughout the pandemic, opportunities arise for experienced investors to consider rebalancing their portfolio and putting their surplus cash to work.
At a time when some of the mainstream investment options such as the equities market have suffered, it could also be the right time for experienced investors to consider adding alternative assets to their portfolios.
And when doing so, ensuring investment decisions complement their wider portfolio – balancing its risk/return profile, matching specified goals and timeframes and helping to make it more diversified where needed – is imperative.