Non-sterling savings (how to avoid hyperinflation)

apt

Hyperinflation in Britain is highly unlikely. But if you are confident that is going to happen you should be buying as much property with as much borrowed money as possible. But there isn't going to be hyperinflation and we are probably in for at least one more year of declining property prices.

MiserlyMartin

I have been thinking about moving out of sterling for some time now. Problem is really that it should have been done at the start of the year when it was worth something still. To move it now may be just a kneejerk reaction.

On the other hand the pound may be hammered far more after another rate cut.

I am not sure how to do it in the best way either so you are not alone. I was thinking AUS$ would be a better bet.

Charles1968

MiserlyMartin wrote: »

I have been thinking about moving out of sterling for some time now. Problem is really that it should have been done at the start of the year when it was worth something still. To move it now may be just a kneejerk reaction.

On the other hand the pound may be hammered far more after another rate cut.

I am not sure how to do it in the best way either so you are not alone. I was thinking AUS$ would be a better bet.

the usual approach to volatility is to spread risk somehow, e.g. by diversifying or pound-cost averaging. I'm wondering if the best approach to sterling's current volitility is therefore to divide up savings into tranches of different currencies, e.g. keep a third in sterling, a third in yen, a third in US or AUS$, maybe even invest some in gold. As there's a risk that sterling might be at a low and could bounce back, you could also apply the principle of pound-cost averaging and move savings out a little at a time, perhasp in monthly instalments. But I don't know what the cost implications of doing this are, or how practical it would be. Do I need to setup a foreign exchange account for instance?

It does seem possible that sterling will nose-dive, particularly if Gordon Brown resorts to printing money to escape from deflation. If that does happen, it makes sense to start getting out of sterling now.

The financial gains of staying out of sterling while it falls could be very considerable. It could well be the best investment anyone in the UK could make for years. I'm surprised at how few people on this forum are committed to sterling at the moment - the losses are huge and growing larger every day.

gozomark

I'm surprised at how few people on this forum are committed to sterling at the moment - thats because its gone down alot... market psychology

the losses are huge and growing larger every day. - only if your base currency is something other than £

Charles1968

gozomark wrote: »

I'm surprised at how few people on this forum are committed to sterling at the moment - thats because its gone down alot... market psychology

the losses are huge and growing larger every day. - only if your base currency is something other than £

I don't agree with your first point. I think people are committed to sterling simply because it's our national currency and because it hasn't occurred to most people that they might be taking a big risk staying with it. I don't think the fall has made people any more committed to it - they were probably committed to sterling before the fall. Force of habit + failing to keep an eye on the global economy are also factors.

Re the second point, the losses are still relevant to UK savers. Consider the position of Person A who stays in sterling relative to Person B who moves their cash into another currency for a couple of years and then comes back into sterling later. If sterling collapses in the meantime (if there is a "run" on sterling, for instance, or if the government resorts to printing money to escape deflation) then Person B ends up far wealthier than Person A. Hence staying in sterling incurs a very serious risk to your wealth.

gozomark

Yes, person B is wealthier than person A, but person A doesn't lose, just doesn't gain. Its the same as someone who owns no shares when the stockmarket goes up doesn't lose

Charles1968

gozomark wrote: »

Yes, person B is wealthier than person A, but person A doesn't lose, just doesn't gain. Its the same as someone who owns no shares when the stockmarket goes up doesn't lose

I agree with that, but would also add that a person who doesn't invest in the stockmarket and chooses only to invest in savings is actually taking a greater long-term risk than the stockmarket investor. In the same way, a person who hoards cash in a safe and has no pension is taking a greater risk than a person with a share-based pension.

If the rest of the world is gaining, then Person A's lack of gain is effectively a real loss.

Brighter people than me have pulled out of sterling in the last few months and done very well by it. I'm thinking it would be sensible to do the same. Sterling currently looks like a very dodgy currency to keep your wealth in.

gozomark

a person who doesn't invest in the stockmarket and chooses only to invest in savings is actually taking a greater long-term risk than the stockmarket investor. - well it depends how you define someones neutral position (ie where they are taking zero risk) - I'd say a neutral position for a UK citizen living in the UK is to be 100% in £, and 100% in riskless savings - any move away from that is taking risk

gozomark

a person who hoards cash in a safe and has no pension is taking a greater risk than a person with a share-based pension - what happens if they are retiring tomorrow or next week, or...

Charles1968

gozomark wrote: »

a person who doesn't invest in the stockmarket and chooses only to invest in savings is actually taking a greater long-term risk than the stockmarket investor. - well it depends how you define someones neutral position (ie where they are taking zero risk) - I'd say a neutral position for a UK citizen living in the UK is to be 100% in £, and 100% in riskless savings - any move away from that is taking risk

Strictly speaking that's correct, but try looking at it the following way. If you take no risk with your investments, then you risk being very poor indeed when you retire, as savings rates minus tax would fail to outperform inflation. Therefore the "neutral risk" investor actually risks committing financial suicide over the long-term.

I would therefore subtly redefine risk to include the risk of making zero nominal returns (and possibly negative real returns) on your investments.

Staying in sterling may be zero risk by your definition, but it could still decimate someone's wealth relative to investors who don't stay in sterling. An analogous situation is property ownership. House prices are falling in the UK, but as long as everyone goes down at the same rate, nobody is better or worse off in relative terms, which corresponds to your neutral risk. Howver, somebody who sells up and keeps out of the house crash ends up much richer in relative terms. Exactly the same principle applies to getting out of sterling. (In fact the house price crash is a double whammy because houses are not only losing value in sterling but sterling is losing value at the same time. Anyone hoping to cash in their home and buy a place abroad when they retire will be in for a very nasty surprise indeed.)