Thoughts from around the Web.
Run, don’t walk, to put some money into the new five-year index-linked certificates from National Savings & Investments.
NS&I [1] is a wing of the UK government, and money you invest with it is 100% capital protected.
You may remember that NS&I’s index-linked certificates were withdrawn [2] due to excess demand last year. Commercial banks have rushed to fill the gap with inflation-proofed bonds [3], but these are less attractive and based in some cases on derivatives. The Post Office also launched a bond, but it could not be held in an ISA, making the income taxable.
The new 5-year certificates from NS&I offer annual tax-free gains of RPI + 0.5%.
As the FT notes [4]:
If RPI inflation remained at its March level of 5.3 per cent, the certificates would pay 5.8 per cent interest tax free. To achieve that return from a conventional, taxed savings account, a basic-rate taxpayer would need to earn a gross rate of 7.25 per cent, a higher-rate taxpayer would need to earn 9.67 per cent, and a 50 per cent taxpayer would need to earn 11.60 per cent.
It’s good news that NS& have continued to link to RPI, as I wrote when we first got wind these certificates would return [5].
The 0.5% rate above inflation is fair in these low interest rate times, though less than the old rate.
Of course, there’s every chance that inflation could fall and interest payable on ordinary savings accounts rise over the next five-years, which could make these certificates uncompetitive. But that is not the point.
Their value as part of your portfolio is diversification on unbeatable terms. No other inflation hedge [6] can give you a guaranteed real return above inflation with zero risk to your capital. They’re a rare break for private investors, too. Banks and other institutions have to buy index-linked gilts, the price of which fluctuates, unlike the capital value of these certificates.
You can even withdraw your money early if the certificates get too uncompetitive, albeit with a reduction in the payment of interest due for the first year.
In short, even limited to £15,000 maximum investment per person, the limited issuance is likely to be snapped up very soon. Blogger Simple Living in Suffolk [7] is beside himself with joy:
All in all, pretty awesome, a safe home for your cash. You aren’t going to get rich on it, but your cash is worth as much at the end of the five year term as it was at the beginning, there’ll just be more of it. I kind of like that in cash.
As I say, I see the certificates as a diversification play as much as about return. I am a chap who loves cash in a portfolio [8], anyway, but these certificates go an extra mile in usefulness.
Their appeal is an interesting sign of the times. It’s hard to remember the days when you could routinely get a real return (i.e. above inflation) from a savings account of 3% or so, yet that was the case for an account-hopping saver just a few years back.
Those days will return, and it may then be hard to remember why we got so excited about these new certificates.
But in the current climate (where I’m still pretty bullish about shares, incidentally) they are a must have.
From the money blogs
- 10 lessons I’ve learned as a small business owner – The Digerati Life [9]
- Index funds work in bull and bear markets – Oblivious Investor [10]
- Black swan down – The Psy-Fi blog [11]
- The latest cyclically-adjusted market P/Es – Retirement Investing Today [12]
- Does news help us manage a portfolio? – The Munro Fund [13]
- How ETFs work [US, but the same everywhere] – Rick Ferri [14]
- Investing in insurance companies – A Grain of Salt [15]
- Richard at iii considers JD Sports – iii [16]
- The youth are unemployed – where are the protest songs? – Bond Vigilantes [17]
- The rising costs of buying a car [graphic – click to enlarge] – Policy Expert [18]
- Hedge fund conviction a reminder of the dangers – Swedroe/MoneyWatch [19]
More on money and investing
- The people versus Goldman Sachs – Rolling Stone [20]
- Banks: Chained but untamed – The Economist [21]
- Another digital gold rush – buy or sell? – The Economist [22]
- All-time high for US exports [graphic] – Business Insider [23]
- The Bank of Canada on commodity price cycles [bit old] – Bank of Canada [24]
- Jeremy Grantham says the latest boom is rational… – GMO [25] [Great PDF]
- …but Bill Miller says its just a cyclical bull market that will burst – FT [26]
- London buy-to-let ‘gold’ [scroll down for interactive map] – FT [27]
- More converts to holding cash in a portfolio [8], albeit permabears – FT [28]
- The day in the life of a private wealth manager – Telegraph [29]
- Can you beat the average return?
– Telegraph [30]
- Double-dip predicted for housing market – Independent [31]
- Downsizing from £60K a year to £16K in West Wales – The Guardian [32]
- An old playboy writes his À la recherche du temps perdu – Telegraph [33]
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