Gold is rubbish, having returned a pathetic 0.06 per cent per year since peaking at $875 in 1980. I don't understand bitcoin and am probably too old to look into it properly. Residential property already makes up way too big a proportion of my wealth. They also tell me that bonds yield nothing and are in bubble territory. I think peer-to-peer lending is itself a reflection of another bubble, where those desperate for some sort of semi-decent return are forced into ever riskier investments. Help!
Santa writes: your options are simpler than you think, and hard to stomach.
Real UK Base Rate
A) Accept that zero and even negative nominal yields are a fact of life today; this is the face of things to come, courtesy of central bank largesse. When even the Bank of England's chief economist says "as best we can tell going back to Babylonian times we're in uncharted territory", you know they haven't a clue. The end is not nigh, though, so waiting and hoping that things will turn a corner is not a viable option.
Therefore start thinking in terms of real interest rates - nominal interest from which you subtract inflation. Charts below are for UK and US ones based on respective central bank target rates. You will notice that yields have been negative quite often, impoverishing you, in Britain because of serious inflationary bouts and in the States because it often has some of the lowest rates in the world.
In a deflationary scenario money tomorrow buys more than it does today and can be seen as an imputed rate of return. Likewise, discounts from the recommended retail price, therefore, yield equals interest plus deflation.
Real US Fed Funds Rate
B) Don't be greedy, tempted to go for so-called 'high yield'. In today's fund manager parlance this is just about any junk-rated paper that pays over 5 per cent - simply not worth getting out of bed for. Annual returns of 10 or 15 per cent, and we start talking, but any more than that and it's a casino. Always remember that the likelihood of getting all your money back is only as good as the borrower's name.
Similarly, try to resist the temptation of borrowing shed loads of money at these rock bottom rates. This is because the value of the obligation will increase as deflation bites. Plus the asset it might be invested in has a good chance of losing value for the very same reason - creating an ever widening hole between the asset and the liability.
C) Enjoy some of the money you have along the way. Knowing that returns are lousy, splashing out on little treats every now and again doesn't hurt so much. In some circles this is known as SKI-ing: Spending the Kids' Inheritance.
Something frivolous, yes; terribly expensive, probably not; something for all the family to enjoy, definitely!
