In this low-interest-rate environment, getting a decent return on your money is harder than it looks.
Cash ISAs are often recommended as a relatively safe place to park your hard-earned cash. But even the best easy-access accounts only offer a paltry 1.4% return a year. £10,000 parked in the best-performing Cash ISA would yield just £140 in its first year.
Interest at these levels adds only a couple of pounds a year to your compound multiplier. If rates drop further as they have done in the eurozone, your returns will be even smaller.
High yield
But there is a way to get higher returns without too much effort. Just like a Cash ISA, with a Stocks and Shares ISA, you get any capital gains or dividends tax-free.
If you made the choice to put your ISA money into a 6% yielding trust instead of cash, you would be £460 richer at the end of year one.
In the second year, your investment you would make you £636 (£10,600 x 0.6). After five years, your initial £10,000 turns into £13,382.25, adding £757.49 across the 12 months.
At a consistent 6% yield, over 10 years this single investment would add £17,908.48 to your pension pot. Such are the incredible gains to be had reinvesting high-yield dividends boosted by the power of compound interest.Â
By my calculations, over the same period, with your money wasting away in a 1.4% inflation-lagging Cash ISA you would be £6,416.90 worse off.
Diversify
Where would I put my money if I was buying into a trust? Well first, it is worth noting that FTSE Russell, which runs the London Stock Exchange, has an interesting piece of research showing that over the last 12 years, pension funds heavily skewed their portfolios to domestic stocks and shares. We’ve all heard how important it is to diversify our holdings, but it’s interesting to note that the largest asset managers are very focused on buying UK companies.
This could be a mistake as the findings show that “maintaining a home bias in asset allocations has been extremely costly” for UK investors.
I think buying shares in a trust that owns the best-of-the-best in terms of overseas assets is a relatively low-risk way to diversify your portfolio while still bringing in market-beating returns.
Henderson Far East Income
The LSE’s Henderson Far East Income (LSE:HFEL) is returning upwards of a 6% yield from its collection of Chinese, Korean and Taiwanese real estate, financial, tech and digital companies.
There is a wide geographical and sector spread, with the largest holdings being the world’s biggest semiconductor foundry Taiwan Semiconductor Manufacturing Co, Beijing-based utilities firm China Yangtze Power, and Hong Kong telecommunications giant HKT Trust, which currently turns over £3.2bn a year.
In the last 12 months, investors have paid an average 1.84% premium to buy shares in the HEFL trust compared to the net asset value (NAV) of the £515m in stocks it holds. Such is the support for this product. At time of writing that premium is around 2.2% so waiting for a dip may pay off long term.
It’s your money. It’s your choice. But by seeing the value in spreading your portfolio net a little wider, effectively with the flick of a switch and trust in the power of compounding, you could make yourself thousands of pounds better off. I know what I’d do.