This article is written in response to requests from several of our readers who are looking to generate an income without taking any risk.
These are not people who are looking to make a big return. Rather they are trying to protect what they have, whilst at the same time trying to provide income – typically to help fund their retirement. And they want to do all this without taking any risk.
This is a difficult task, but it’s one faced by a large number of investors and those with wealth.
Designing the perfect portfolio
In this environment of massive deliberate currency debasement, every portfolio should have some exposure to precious metals. With that in mind 20% of the “perfect portfolio” invests in a mixture of physical gold, physical silver and precious metals mining companies. The exposure to the miners is provided via the Black Rock Gold & General Fund which is held inside a stocks and shares ISA.
The remainder of the portfolio is divided into nine segments, the majority of which are 10% of the overall portfolio. The primary objective of each of the remaining segments is to beat the rate of inflation without incurring any risk*.
The perfect portfolio for risk-averse investors & retirees
Segment 1: Santander Inflation Linked Savings Bond
Segment one is invested in the Santander Inflation Linked Savings Bond which are designed to provide protection from future rises in inflation. The bond pays 105% of any increase in the Retail Prices Index (RPI). Therefore if RPI stays at its current level of 2.9%, it would pay 3.05% a year. However, as we’ve discussed before, inflation will be heading back up before long. Even if inflation falls, it guarantees to pay a minimum of 4% gross over the term.
The bond matures on 1 December 2018 and is only available until 5 November (or sooner if sold out). Find out more…
Segment 2: Nottingham Building Society Starter ISA – Issue 2
Segment two is invested in a Starter ISA provided by the Nottingham Building Society. The ISA pays 5% tax free. However on 5 April 2013 the balance will be transferred to their lower variable rate. You must also pay between £1 and £470 into your account each month. Find out more…
Segment 3: West Bromwich Building Society Regular Saver Adult
Segment three is invested in the Regular Saver Adult account provided by the West Bromwich Building Society. The account pays 4.10% for a fixed period of 12 months. However withdrawals are not permitted within the 12 month fixed rate period, and a minimum of 10 regular monthly payments of £10 to £250 must be made. Find out more…
Segments 4 & 5: Zopa Peer-to-peer Loans
Segments four and five are invested in peer-to-peer loans through Zopa. Segment four is a “Shorter term” loan, which means it’s made to borrowers getting a 2-3 year loan. The rate is 4.4% which is calculated as 5.9% less the 1% annual fee and the 0.5% expected bad debt.
Segment five is a “Longer term” loan meaning it has a maturity of 4-5 years, and it pays 5.7% (7.1% less the 1% annual fee and the 0.4% expected bad debt). Both loans were made to borrowers categorized as “A*”, which are those with the highest credit scores.
Zopa is an online marketplace that allows people with spare money to lend it directly to people who want to borrow money. The company has been around since 2005 and £237 million have been lent through the service. Find out more…
Essentially we’ve created a laddered fixed income portfolio with the added protection of gold, and potential upside offered by silver and precious metals miners. The portfolio contains investments that mature in 7 months, 12 months, 2-3 years, 4-5 years, and 6 years, which provides those in retirement with regular lump sums, and all of the interest-bearing investments are either linked to the rate of inflation, or yield more than the current rate of inflation.
This type of portfolio can be customized in terms of maturity, percentage and type of investment held, and in terms of risk appetite. For example, lending to category B borrowers through Zopa provides an average yield of 7.6%. However it is necessary to actively manage the portfolio in order to rollover any unwanted maturing funds into new investments.
Over the coming months we will continue to look out for savings accounts and investment ideas to fill the remaining segments of the portfolio. In the mean time those interested in inflation linked savings vehicles should keep an eye on the Inflation Linked Bonds provided periodically by the Post Office. It’s also possible to register for news of NS&I’s Index-linked Savings Certificates.
It’s important to stress that this article is not intended as investment advice, rather it’s designed to provide investors with ideas and food for thought.
*A word about “risk free” investments… there’s no such thing
The fact is there’s no such thing as a “risk free” place to put your money. There is always some risk however small. The most obvious risk in today’s world of ultra-low interest rates is inflation.
For example, you could put your money in ING and earn 2.70% AER (2.67% gross p.a.), but inflation here in the UK is currently 2.9% (RPI). In this scenario losing money is not a risk, it’s a certainty. And let’s not forget that our true cost of living is rising much more quickly than the governments figures suggest.
Even if you do put your money in a savings account that does beat the rate of inflation. Is your money really 100% safe? Well, if it’s less than £85,000 and it’s in a UK-regulated current/ savings account, cash ISA, building society or credit union, then in theory, if the account provider goes under, you should get your money back within seven days.
However that’s in theory. In practice we could see a scenario in which a derivatives blowup or other systemic crisis brings several banks to their knees. In which case, the government would have to print a few hundred billion in order to pay you your money, and so you’d be receiving money that was considerably devalued compared to what you had originally saved.
Also the government-backed Financial Services Compensation Scheme (FSCS), which provides this “compensation fund of last resort”, may not be able to help you if your money is in a European-owned bank that operates in the UK. In this scenario you are likely to find yourself trying to claim your money back from the bank’s home country’s compensation scheme, which, like many European countries, could also be insolvent.
Savers should also note that when it comes to the £85,000 limit on FSCS payouts, accounts at sister banks such as Halifax and Bank of Scotland, are counted as one.