What should the cash-rich investor do?
By
MoneyWeek editor-in-chief
Merryn Somerset Webb Mar 08, 2010
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A friend has sent me an e-mail saying she has just sold her flat in London – at what, I imagine, will turn out to be the top of this market's mini cycle. That's good – as is the fact that she is planning to sit out the next year or so of property market fluctuations and rent instead.
But it comes with complications. It means that she has a large pile of cash sitting in the bank earning next to nothing in interest. And, like most other sell to renters (STRs in internet speak), she has no idea what to do with it. She moves in smart circles and has been told she should invest in the dollar instead of keeping her money in sterling. But she doesn't know how. Can I help?
Would that I could. My own house money is sitting in exactly the same place, earning an equally dismal sum of money. I'd love it to be performing a little better. In fact, in today's weird world – where inflation is running at more than six times the base rate – I'd be totally thrilled if I could just find a way to be evens after tax and inflation.
What I can't do, however, and what I can't advise her to do, is to take any risk at all. She will be buying her next house in cash and in sterling. So, unless she wants to take the risk of not having a next house, sterling is what she has to keep it in. That means no equities and no bonds (particularly not government bonds). It means no ludicrous alternative investments, no structured products, and most certainly no currencies.
Instead, she has to find the best short-term savings rates she can (probably starting with the 3.16% available from the Investec High 5 account and working down to the 2.8% on offer from the Halifax Web Saver Extra account).
Then, she has to divide the money into £50,000 chunks (the maximum compensation under the Financial Services Compensation Scheme should your bank fail).
Next, she needs to understand that inflation will steal at least a couple of percent a year from her stash, hope that falling house prices will more than make up for the loss – and live with the frustration. It isn't a good time to be a saver. But, for the STRs, it is an even worse time to be a property speculator.
All that said, if I were going to speculate in the currency markets right now, I probably would sell sterling to buy the dollar. This is not because I think the US economy is in any better a state than those of, say, Europe or the UK. It is simply because the dollar remains, for now at least, the world's reserve currency and, as such, one of its perceived havens. When the financial crisis broke back in 2007, investors, instead of fleeing the currency representing the country where it all started, fled to it.
They may not still be doing that a decade on, but I'd be surprised if the dollar lost its status this year.
I last wrote about this in October 2009 when I said that, after the relative calm – and dollar weakening – of 2009, I expected to see something of a "snapback" in the dollar. That has begun to happen – the dollar is up 10% against the euro since December.
But given how much we are all going to worry about sovereign debt crises and crave havens, I should think there is further to go.
Finally, a quick word on last week's column. Given how expensive the new Fidelity fund is turning out to be, readers have been asking for a cheaper way to get into the Chinese market. The obvious answer is via an index-tracking exchange-traded fund (ETF). But, even here, there is a gap between the good and the bad.
Consider, for example, one of the most popular ETF routes into China: tracking the FTSE/Xinhua 25. If you believe the China story and want to be invested in it for the long term, you are going to be looking for exposure to the rising consumption of the middle classes that the bulls keep going on about. But you won't get it here. Instead, as Cris Heaton points out in MoneyWeek Asia, you'll get a portfolio that is heavily concentrated in banks, telecoms and natural resources: more than 45% of the fund is in financials and a mere 1.6% in consumer services.
So, what if you're looking to get exposure to the Chinese market but don't want to pay through the nose? Look at ETFs listed in the US, says Cris. The SPDR S&P China ETF is still heavily invested in financials and energy but adds some diversity with an 11% weighting in consumer sectors. Otherwise, look at the Claymore/Alphashares China Small Cap Index ETF, which has a lower exposure to financials and very low exposure to energy. Both are cheaper than a managed fund. But, as ever, cheap doesn't mean low risk – STRs should still steer well clear.
• This article was first published in the Financial Times
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