Introduction 

• In the modern, connected world there are hundreds, maybe even thousands, of different ways to invest your money inside and outside of the stock market. The aim of this piece is to highlight and deep dive into some of the best alternatives to stock market investment. More than this, the blog will highlight why you should consider these options, and also highlight which options I use myself.
• I don’t talk about ‘Bricks & Mortar’ investment in this piece because as I am not myself a home owner so don’t feel it’s my place to offer advice, as well as the fact that the aim of this piece is far more liquid types of investment rather than the illiquid home owning market.
• In a previous post I have discussed in detail how I got into stock market investment, the benefits & risks associated with it and the lessons I learnt doing so, you can find it here: http://jablifestyle.net/2016/08/07/starting-stock-market-investment/

Uncertainly of the Stock Market 

• Donald Trump is president of America, the UK has voted to leave the European Union and China appears to be on the edge of its own debit crisis. The world is more than a little bit crazy at the moment and this causes a significant amount of uncertainty in the stock market. Whilst this does provide opportunity for some investors, it can be a major put-off for those who are more risk adverse.
• This is a totally acceptable response, there is no doubt that whilst markets are currently hitting record highs, volatility is a reality. For example, during the first week of trading in 2016 more than $2.3tn was wiped off global stocks, if your life savings are wrapped up in that at minimum you’ve had a very stressful couple of weeks, at worst you’ve lost almost everything.
• Therefore, whether you are risk averse, scared of the current environment, have no faith in global CEOs or just hate the stock market there are many legitimate reasons to give it a miss. However, that doesn’t mean you should give up on getting a good return on your savings and build towards a better future for yourself.

Alternatives to Stock Market Environment 

• Cash ISA
  • What is it? Cash ISAs are the traditional tax-free investment options for risk adverse savers. Almost every bank offers them and they can be easy access. The government has tried to incentivise people to put more money into their ISAs by increasing the yearly tax-free cap from £11,520 (although only half of this, £5,760, can be cash) to £15,000 in 2015. However, with interest rates being so low people are getting terrible interest rates, done are the days of 3+% a year. However, there is still one type of ISA which is looking good….as long as you are looking to buy a house! The Halifax Help to Buy ISA is offering 4% return and then the government will offer 25% of the value to support your first home purchase.
  • Positives
    • Cash ISAs are very quick and easy to open.
    • Cash ISAs are a very safe way to invest, just as Andrew Ross Sorkins book title states: banks are too big to fail so very rarely do. Plus, just like with Current Accounts, your first £75,000 is guaranteed by the Financial Services Compensation Scheme.
  • Negatives
    • The current interest rates on Cash ISAs are nothing short of terrible, the average variable rate cash ISA was 0.85% in 2016 and is highly unlikely to change anytime soon.
    • You are losing money to inflation. As of December 2016 the UK inflation rate was 1.6%, that means your savings will be depreciating in value in a Cash ISA.
• Peer2Peer Lending 
  • What is it? In the UK, there are 3 big players in the Peer2Peer lending game; RateSetter, Zopa & Funding Circle. P2P lending has ballooned massively as an industry in recent years. Peer2Peer lenders are sometimes referred to as crowd-lending platforms, marrying up individual savers and individual borrows both looking for a good rate. By cutting out the banking middle-man these companies are able to provide a better rate to investors and borrowers.
  • Positives
    • The rate of return you get is far superior to Cash ISAs. Whilst you’ll be lucky to get 0.5% a year on your Cash ISA, P2P Lenders are offering in the region of 3% for 1 month investment going up to 5% for 3-5year investment.
    • For the individual, it feels just like saving, the Peer2Peer lending company does all the chasing of borrower, you just see the interest grow.
    • The industry is now regulated, it started being regulated by the FCA (Financial Conduct Authority) in April 2014. It’s also worth noting that in April 2017 companies will have to have at least £50,000 worth of funds in reserves, to act as a buffer to ensure they can withstand financial shocks/problems.
  • Negatives 
    • With normal UK savings, the government-backed Financial Services Compensation Scheme promises it’d pay the first £75,000 per person, per financial institution if the institution goes bankrupt. Peer-to-peer lenders don’t have this, even now they’re regulated.
    • This is a new and innovative industry, although there haven’t been any big horror stories or glaring issues so far, be aware that the future is always unknown.
    • There are obviously a number of alternatives to stock market investing, but for the sake of time and space I will highlight the ones I think are worth considering, and popular right now. I will explain the 4 biggest below, detailing the positives & negatives. I’ll save my own rational for investing in the one’s I do until later in the post.
• Current Account Interest 
  • What is it? Since the massive slash in interest rates as a result of the 2008 financial crisis banks have been offering more attractive current accounts to get people using the 7 day current account switching guarantee to move to them. The two most popular are the Santander 123 Account and the TSB Classic Account. I won’t go into a huge amount of detail here, as I have a dedicated post on switching current accounts, you can find it here: http://jablifestyle.net/2016/10/25/finding-a-new-current-account/ .
  • Positives 
    • Easy access to money, you don’t have to lock it away for any defined period of time.
    • Current Accounts are part of the Government-backed Financial Services Compensation Scheme you the first £75,000 you have is guaranteed if institution goes bankrupt.
    • Returns can be solid, with the TSB Classic Account Customers can earn up to £238 a year.
  • Negatives 
    • The return is poor compared to Peer2Peering Lending so I wouldn’t advise this being your only investment strategy. For example, with my TSB Account I get £5 cashback on the first £100 contactless payments I make and 3% on my balance up to £1,500, that means roughly £12 per month. With P2P the potential gains are much higher as you get interest on all the money you invest.
    • There is an incentive to spend more than you would normally. To get the additional cashback from the TSB Account you might spend more on contactless payments than normal – these extra payments could be greater than the reward you’ll receive.
• Premium Bonds
  • What is it? Often described as ‘like the lottery but you always get your stake back’. Each and every month, the UK government-backed National Savings and Investments give away two £1m prizes, a handful of £100,000, £50,000 and £25,000 prizes, and a huge number of £25, £50 and £100 prizes to those who have Premium Bonds.
  • Positives
    • There is no such thing as an interest rate for premium bonds, however the nearest thing premium bonds have is the “prize fund rate” – the average that people will win – which is 1.35%, larger than Cash ISA return currently.
    • You could always win a life-enhancing sum of £100,000 or £1m, making the dreamer within us happy!
  • Negatives
    • The dreamer within you might be waiting a very long time….your chances of winning the big prize are incredibly small, “For each draw, the odds of a single premium bond winning the £1m prize is 26.7 billion to one. And even the odds of winning a prize at all with each £1 bond is just 26,000 to one according to NS&I.
    • Premium bonds are not suitable for individuals who are worried about the long-term effects of inflation. If you never win and inflation raises at 2% a year, the value of your investment is -2% each and every year as the power of your money has reduced.

What I’d suggest 

• Above I’ve detailed the biggest four alternatives to stock market investment, these are the main options I believe exist for an individual looking to invest outside of the stock market, however I’m sure some of you are asking; which of these do I invest in?
• Having a diversified portfolio is very important, hence why I’d never only have 1 of the above, and the same reason I’d never only invest in the stock market, however diversified my investment fund holdings.
• Based on this fact, I have some of my savings in Peer2Peer Lending and some in a Cash ISA, and use a current account with benefits. I am fairly new into the Pee2Peer Lending world, and have only had good experiences, but because it’s such a new industry I have my concerns and haven’t put a significant amount of money in there, yet. My money is with RateSetter as I think it’s the easiest to use & navigate.
• My Cash ISA is only used to hold my ’emergency funds’, the money which I’d need to last me 3 –4 months if something major happened, due to the terrible low return it gets. It’s very easy to access and I have yet to reach my yearly tax free cap so having to pull money out if required won’t increase my tax bill any time soon.
• I recently moved my current account to TSB, you can see my detailed experience and thoughts on that here; http://jablifestyle.net/2016/10/25/finding-a-new-current-account/.
• I have flirted with the idea of investing in Premium Bonds a couple of times, but for me the dream of winning the £1m prize feels too unrealistic to be worth it, so I end up putting any extra money into one of the other investment vehicles I already have.

Conclusion 

• In conclusion, there are a number of alternatives to stock market investment, if you’re put off by the recent volatility or too risk adverse to want to invest there. The returns you’ll get outside of the stock market reflect the risk profile associated with them, often they are lower risk and therefore offer a lower return.
• As alluded to at the start, the one area I haven’t touched upon in this post is investment in ‘Bricks & Mortar’, I.e. housing. This is because as of now I have none of my own money in property, therefore don’t feel in a position to advise on it.
• Overall, the key to a long-term investment strategy is divestment, whether that is inside the stock market, outside the stock market or a mixture of both, never have too many eggs in one basket. I hope the above is a good guide to help you understand the best ones for you personally.

 

Photo Credit