Tim Bennett explains why the introduction of a new coin doesn’t solve an age-old problem for savers.
Why a new £1 coin won’t help savers
This week we saw the release of the new £1 coin, which will gradually replace the existing one that was launched in 1983. The new coin looks different and comes with all sorts of new features. However, for savers it won’t solve an age-old problem: how to deal with inflation.
The inflation challenge
The problem with hard currencies, in the form of shiny coins, is they can lull you into a false sense of security when it comes to protecting your wealth. That’s because although a coin minted in 1983 may look more or less similar to one minted more recently, its purchasing power has been eroded substantially over that period. To take just one example – £1 in 1983 could buy about 18 eggs, according to the Office for National Statistics, whereas now it will buy you one box of six.
Graphically the problem looks like this;
The problem facing savers
Cash is clearly a useful asset for day-to-day transactions (although increasing numbers of these can be done electronically) and it is a safe home for your emergency fund of up to six months’ of income that will tide you over should you become ill, lose your job or need to suddenly repair a leaky roof.
However, as a long-term store of wealth it has proven itself to be pretty unreliable as the following data on real returns from Barclays shows;
The best approach
When it comes to building long-term Lifetime Savings, savers therefore need to be thinking more broadly than cash. Whilst past performance is never guaranteed, the chart above reveals that shares and bonds have proven their worth historically by beating cash returns. That said, you must take the right approach to managing them, as they can both suffer much more price volatility in the short-term.
At the most basic level, the way we see these different assets fitting into a saving strategy looks like this;
Common sense is still required within this framework – for example the Lifetime Savings portfolio for someone who is about to retire may look quite different to that of someone for whom retirement is still thirty years away.
Some rules of thumb
Anyone committing to shares as a long-term investment must obey certain rules to stand the best chance of building their wealth. These are summarised below. To discuss these and any other aspect of long-term saving and investing, please speak to an Investment Manager.
- Never panic-sell in a downturn
- Avoid being forced to sell in a downturn
- Don’t blindly follow the crowd
- Diversify to reduce single stock risk
- Commit to time in the market
- Only invest in things you understand
- Make sure that your investments, your time horizon and your risk appetite match up
- Regularly review your portfolio to ensure it remains appropriate
- Save as much tax as you can by investing tax-efficiently