Life as an investor is never easy, but thanks to Brexit it just got a whole lot tougher. That’s because the outlook for the UK and world economies is now more uncertain than ever. This makes it difficult to know what to do with spare cash in order to maximise returns while still keeping risk within an individual’s comfort zone.
One option is to deposit cash in a savings account. The advantage of doing so is that its capital value will be maintained and a small return will be generated each year. Furthermore, it will allow an investor to keep their powder dry so that if a recession hits the UK and/or world economies, it will be possible to take advantage of even lower asset prices.
However, holding cash for long periods has historically been an unsuccessful strategy as inflation eventually beats returns and causes its value to fall in real terms. Although inflation is low at the present time, it could move higher due to a weaker sterling causing imports to rise in price.
Bonds or property?
Bonds could suffer from the same fate as they offer a fixed rate of return that may be outmatched by inflation. That’s especially the case as bond yields are exceptionally low at the moment after a number of years of loose monetary policy. Therefore, while bonds could be seen as a safer place to invest due to their historically lower risk profile compared to other asset classes, there may be better options available elsewhere.
One of those is almost certainly not destined to be property. A mixture of tax rises on second homes, a phasing out of mortgage rate relief for higher income earners and high valuations look set to conspire to stunt UK house price growth. Even lower interest rates are unlikely to be enough to keep the property price escalator moving upwards, since there’s limited wiggle room for interest rate falls.
Share-buying opportunities
Therefore, the best option for spare cash may be to buy shares. That’s not to say just piling-in is the right move and things could get worse before they get better. Keeping some cash is always a sensible idea in case of financial hardship. However, there are a number of stocks in a wide range of sectors that offer wide margins of safety thanks to their low valuations. Furthermore, they have high yields with dividends being well-covered and forecast to rise over the coming years.
Certainly, in many cases they’re dependent on the performance of the UK economy. But even if the UK experiences a recession, it has faced similar situations in the past and always bounced back. Therefore, a dip in economic performance could prove to be an excellent time for long-term investors to buy.
A key reason for this is the FTSE 100’s performance since inception. It has risen from 1,000 points in 1984 to over 6,000 points despite numerous shocks, challenges and periods of grave uncertainty. Leaving the EU is likely to feature high up on that list of challenges and there will inevitably be losers as a direct result of the referendum outcome. However, history tells us that investors who buy shares during uncertain periods are rewarded. Therefore, shares seem to be the best option on offer for long-term investors.
