Cash alternative safest investment

nxdmsandkaskdjaqd

If you are looking for an alternative to cash, what is the safest cash alternative asset class investment option for say a SS ISA?

2010

There isn`t, hence the warning.

"investments can go down as well as up"

nxdmsandkaskdjaqd

2010 wrote: »

There isn`t, hence the warning.

"investments can go down as well as up"

I am OK with that. What I am looking for a place to start the research, is it gilts - long or short or corporate bonds etc.

tacpot12

I'm not so sure that there isn't a 'safest' asset class. Looking at Trustnet, it seems clear that the 'safest' asset classes are (in order of safety)

1. Cash-like instruments
2. Short Dated Stirling Bonds

'Cash-like instruments' are only safe in terms of having extremely low volatility. They are not safe in that you are generally guaranteed to loose money investing in this class as it doesn't product enough return to cover the charges of holding the 'asset'.

This makes short term sterling bonds (either government or investment-grade corporate) the safest long-term asset class in my eyes.

This is one asset class where having an experienced team actively deciding which bonds to purchase is a significant factor in the safety of the investment. So select a large fund with a historically successfully fund manger, and keep monitoring them against their peers for maximum safety.

bowlhead99

nxdmsandkaskdjaqd wrote: »

I am OK with that. What I am looking for a place to start the research, is it gilts - long or short or corporate bonds etc.

Government gilts are safer than company bonds because the government can print money to be able to pay you off, whereas a company cannot.

Short-dated bonds which mature soon are safer than long dated bonds. There is less time for the company to go bust before they pay you off, and also in the current low interest environment it may be relatively easy for them to refinance by issuing new debt to some other investor and get the cash together to pay you off.

Long dated bonds are all priced at way more than their face value, e.g. in the market you have to pay £152 for a £100 bond in Glaxo Smithkline which matures at the end of 2033. Along the way it pays you a headline rate of 5.25% on the £100, but that is much less than 5.25% on the £152 you actually paid, and at the end of the term they don't pay you back the £152 you bought it at, you just get the £100. So for letting them have your money for 17 years, you got an effective yield to maturity of less than 2%.

And even if the 2% sounds OK now, the issue with paying a lot over face value is that the value might drop significantly when the interest rates in the market change. For example, in a few years time when rates have risen, and people demand a return of 5% or more for an investment in a company with Glaxo's credit rating, people will no longer be willing to take it off your hands at a crazy high price which only gets them an effective 2% return. So they may only want to pay you £100 or less for a bond which pays 5.25% a year and returns £100 of capital in the year 2033. In that situation you would have lost a third of your capital (£152 invested, only £100 or less back), if you wanted to get out.

So, short dated (a couple of years or less) is much safer than long dated as you are probably not buying at a price massively over the nominal value and there is minimal time for the borrower to go bust or for the market rates to change and you be forced to cash out because you need the money. And government gilts are safer than company bonds. So this leads you to short dated gilts as the safest option other than FSCS insured cash.

One other option is short to medium dated index linked gilts whose prices are driven not just by interest rates but also expectations of future inflation rates. You receive the declared annual coupon yield on the original nominal value (which as with 'normal' bonds in the current market, will be less than what you pay for it) but the annual coupon increases with inflation. However, current expectations of how inflation (and coupon) will likely rise, are already forecast by the market and worked into the price. As index-linked gilts are popular, the effective yield to maturity with current inflation expectations is negative.

Nice safe index linked gilts maturing in less than about 8 years have an implied annualised NEGATIVE yield of 2% or more. If you get the ones maturing in 2062, you have to pay over £250 per £100 of bond and wait 45 years with payouts of 0.375% of the £100 along the way. So that's an implied negative yield of 'only' negative 1.65%. The gamble is that inflation goes through the roof rather than merely going up to the level the market expects, and then you would enjoy a payout of quite a bit more more than 0.375% on the £100 each year, and not lose so much money even when buying in at over £250.

Reaper

Here is just one of many options I am considering to invest more in...

Some investment trusts have raised their dividends every year for decades, even through market crashes and recessions. This lists many of them:
http://www.thisismoney.co.uk/money/investing/article-3480413/Dividend-Heroes-revealed-Investment-trusts-longest-history-raising-payouts.html

BUT you must be aware of the disadvantages and risks. Off the top of my head...

There is no guarantee they will be able to sustain and keep growing the dividend. If they ever break their long term dividend record you can expect the share price to take a big hit.

If competing savings and investments start to offer better rates in future these are not likely to follow, meaning they look poor in comparison and their share price will fall. The reverse would be true but it is hard to see how interest rates can fall any further.

Some of them don't offer great yields, but check each one as they vary a lot. Some do offer a good yield while others offer less but try to include some growth too.

Glen_Clark

2010 wrote: »

"investments can go down as well as up"

Yes, but at least investments can go up. Wheras sterling cash only ever seems to go down (inflation)
As far as I can recall Britain has never really had deflation. The threat of deflation is just an excuse to print more money, drive up inflation, and soft default on their debts.

dunstonh

nxdmsandkaskdjaqd wrote: »

I am OK with that. What I am looking for a place to start the research, is it gilts - long or short or corporate bonds etc.

That would be really poor quality investing. Limiting yourself to one asset class with limited potential and viewed at the higher end of its cycle is actually more risky than a balanced portfolio containing all asset classes.

Risk is a sliding scale. Every option has risks. Even cash. If you place cash at risk 1 and then scale everything up from there then you tend to find the options in risk 2 and to some extent 3 are barely worth the effort. i.e. the extra return potential is not great but you still suffer capital loss potential. So, if you are nervous, then going one or two steps up the scale is not normally a good idea as the outcome wont be good enough to make you feel it is worth it and they will still suffer periods of loss.

nxdmsandkaskdjaqd

dunstonh wrote: »

That would be really poor quality investing. Limiting yourself to one asset class with limited potential and viewed at the higher end of its cycle is actually more risky than a balanced portfolio containing all asset classes.

I do have other asset classes (95% equities), but looking at putting some cash into something else with a low risk.

EdGasket

Gilts and bonds are high risk right now because their capital values are high and will fall in value at the first hint of an interest rate rise. You might try inflation-linked gilts because although the capital value of these would fall also if interest rates rise, any uptick in inflation would limit the fall. You can also limit the risk with gilts and bonds by buying short-dated as said above as they are close in price to their redemption value and hence can't fall much.

Also have a look at iShares ERNS fund which invests in ulta short-dated corporate bonds. Not much income but low risk. You can't have a good income without risk at the moment.

steampowered

Do appreciate that there is risk no matter what you do. I imagine you are talking about 'investment risk', but there is also a concept of 'inflation risk'.

Keeping your money in cash or bonds creates inflation risk, since you are getting a fixed return, which may not keep pace with inflation. On the other hand investing in equity creates investment risk, since those investments typically rise with inflation but you aren't entitled to a fixed return will lose out if the investment performs poorly.

It would probably be best for someone in your position in an investment fund which invests in a range of government bonds and corporate bonds. It is less risky to be invested in a range of bonds through a fund, rather than buying them directly, since the insolvency of one company would only damage a small part of the fund.