Where to Keep Your Money?

In an attempt to stimulate the economy following the 2008 financial crisis, central banks around the world have followed expansionary monetary policy with the intended aim of keeping interest rates at record lows. Low interest rates would stimulate business investment, consumption and spur the economy back on the trajectory of growth and prosperity, so the theory goes. Mario Draghi, governor of The European Central Bank (ECB) has even gone one step further, early this month, by deciding to cut the ECB base rates to -0.1 percent, with the unusual consequence of banks now being charged for parking funds with the ECB overnight.

Indeed, parking your money in a bank account is probably now costing you money, after taking into consideration such factors as inflation, which in most cases exceeds the meagre, or now if any, interest paid out on deposits.

So investors have gotten creative by thinking of ways of how to employ their money for a better return. Tap in alternative investments in Google and you are swamped with choices. For example, funds that specialize in alternative investments; Forestry Investments offering 8 to 18 and Farming Investments offering 7 to21 percent per annum. Some investors are even turning their hobbies or interests into potential lucrative investment vehicles and it ranges from art, whisky and wine, classic/vintage cars and even watches. These “passion assets,” have done rather nicely, according to a recent article in the Telegraph. Classic cars were the best- performing alternative investment, returning 257 percent in the seven-and-a-half-year period, while the value of classic watches surged 176 percent and jewellery jumped 146 percent.

But from a practical stance how feasible is it for middle low income earners to invest in a vintage/classic car? Moreover, would they know whether the cylinder head or the catalytic converter on a classic 150,000 USD Ferrari is worn and are those precious stones authentic sapphires and rubies? Most of us don’t possess intricate knowledge of a combustion engine or have a trained eye to determine whether precious stones are indeed precious. Additionally, there is the issue of safely storing the asset and the cost of insuring it.

So for the average investor, or retail investor, their risk taking capacity is far less than wealthy individuals or institutional investors. Furthermore, their knowledge of alternative investments maybe limited. Perhaps for this reason shares and bonds are still the preferred investment vehicles for the retail investor.

Certainly, the recent International Public Offering (IPO) for the TSB shares may underscore the fact that there is still a healthy appetite amongst retail investors for equities, albeit attractively priced IPOs. Apparently, retail demand was high for TSB stocks, which enabled the issuer to price the shares at just above the mid-point of the 220-290 range it had set. What's more, Joe public who invested in TSB through an intermediary/stockbroker, were rewarded a handsome 12 percent in the first day of trading. In other words, investors who applied for 2,000 pounds sterling in TSB shares were allocated 769 shares and if they had sold their shares on the first day of trading they would have banked an easy 240 pounds-that’s a nice play for a few taps on a keyboard, or a two minute dialogue with your stockbroker, particularly, in the era of austerity with pitiful interest rates on deposit accounts. Moreover, you didn’t need to be high up the food chain to be invited to pick the fruits. Indeed, the recent TSB float was also an invitation to treat for the retail investor. Perhaps the only drawback of the recent TSB float is that some retail investors might not have been able to buy as much as they wished from their intermediary/stockbroker due to the large demand from the public. For example, those that invested 2,000 pounds sterling would have received the full allotment amount of 769 shares, but anyone applying over that amount would have received 769 shares plus 30% of the excess they applied for over that amount. So 10,000 pound sterling application was scaled back to 1,692 shares worth £4,399. Bearing this in mind, if you believe that demand from retail investors in a pending IPO is likely to be high it might be prudent to oversubscribe for the shares, since you are unlikely to be allotted the full amount of shares you’re applying for through your intermediary or broker anyway.

And then there are bonds, which is where the investor (the bondholder) purchases debt in exchange for regular interest payments. The bond holder is also promised by the issuer (party receiving the money), to repay the face value of the bond (the principal) at a specified date (maturity date.) It’s supposedly less risky to invest in bonds compared to shares. This is so because in the unfortunate event of the business insolvency/bankruptcy, the bond holder (investor in bonds) comes ahead of the equity shareholders in terms of payouts should the entity be made insolvent.

Most retail investors have bought corporate bonds through funds, which invest in a number of different firms thereby spreading the risk accordingly. However, the downside to investing in bond funds is that you will also need to pay the fund manager fees.

In 2010 the London stock exchange launched a retail bond market, called the Order Book for Retail bonds, known as Orb. The aim of Orb is to encourage more firms to go direct to personal investors with bonds as the minimum investment is lower. The minimum investment for these types of bond starts at just 100 pounds sterling but more usually it is 1,000 pounds sterling.These types of investment, available to retail investors have been dubbed “retail bonds” and can be purchased through your stockbroker/intermediary. Retail corporate bonds have been relatively popular with the retail investor, approximately one billion pound sterling where invested in this type of asset last year.

With pitiful interest rates on saving accounts available today it has been those savers who have thought outside the box and have been savvy enough to assess the risk rewards of their investments have done well for themselves.