Investors need to rethink how they define their attitude to risk, as one investment expert doubts they can find low-risk options in the current economic climate.
Ben Yearsley, head of research at self-service trading firm Charles Stanley Direct, believes that other than cash, all investments now carry a higher degree of risk.
He says that even government bonds – the traditional asset to have to protect a portfolio against fluctuating equity returns and inflation – are becoming unattractive.
“The bonds for heavily indebted countries in Europe are looking shaky and even bonds for countries which have sounder finances are offering poor returns – often below inflation rates,” said Yearsley.
He says that investors have increasingly changed their views of what makes a high or low risk, particularly since the onset of the financial crisis in 2007.
In that time, investors have made safety a priority rather than growth which led to the popularity of over-priced and low yielding government bonds.
However, Yearsley argues that the recent Cyprus crisis has put the situation into sharp focus for many investors who have been shaken by Cypriot authorities raiding bank accounts to help smooth a Eurozone bail-out deal.
“When cash being held in banks is sacrosanct no longer, it’s a wake-up call,” he said.
Yearsley says investors should be looking at long-term investments to bring returns higher than inflation, which is the aim of most investors.
Equities top his list of recommendations and while admitting that there aren’t the bargains around that there were a few years ago, there are still generous dividends of up to 5% being yielded.
“While equities remain a volatile investment choice, they are a sensible one for those looking for the best long-term results,” he said.
Equities promise growth
“There is no reason to believe that equities will not perform well in an environment of modest inflation and low interest rates.”
Investors should look at equity funds, he commented, which bring in a decent level of return but have the potential to rise considerably over the coming years.
He also recommends that investors should look again at gold even though its recent performance has left many experts baffled, especially after registering its biggest daily price fall in decades.
Yearsley points out that the price of gold should increase steadily increase because its supply is finite and it should appreciate more as paper currency is increasingly printed.
However, that fall should spark the interest of investors looking for a bargain, particularly in a physically-backed gold ETF or a gold mining fund.