What are negative interest rates and how can I protect myself?

Edward Sheldon, CFA
·3-min read
Union Jack flag hanging from a building
Union Jack flag hanging from a building

Recently, there’s been a lot of talk from the Bank of England (BoE) about ‘negative interest rates.’ For those in the UK with savings, this is a worry.

Not sure what negative interest rates are? Don’t stress. Here, I’ll explain what they are and how investors like me can handle them.

What are negative interest rates?

Usually, when we put our savings in the bank, we receive some (positive) interest for lending that money to the bank. Interest rates haven’t been high in the recent past. Yet it has been possible to pick up interest of around 1% per year.

With negative interest rates, however, the idea is that we could be charged interest to save our money with the bank. In other words, instead of receiving interest, we’d have to pay it. The goal of negative interest rates is to get people saving less and spending more in order to boost the economy.

It’s hard to know how negative rates would work in reality in the UK. They’ve already been introduced in some other countries and so far, savers haven’t been charged to save money. Banks are the ones who get charged from their central banks.

The bottom line is, however, is that if the BoE introduces negative interest rates, we can expect the interest rates offered on savings accounts to become even worse than they are today. This would make it even harder to grow our wealth.

How to protect our cash

One of the easiest ways to protect our cash from negative interest rates is to invest some of the money. Instead of leaving it all in the bank, earning minimal interest, it could be a good idea to invest some of it in growth assets that have the potential to generate healthy returns over time.

Shares are one asset to consider. Historically, shares have been one of the best performing asset classes over the long term, delivering returns of around 7-10% per year on average. If we’re earning this kind of return on our money, we won’t have to worry too much about negative interest rates.

The beauty of investing in shares is that investors don’t need a lot of money to get started. And they can invest tax-free through a Stocks and Shares ISA.

We can also tailor investments to match our risk tolerance. For example, if we’re risk averse, we could stick to investing in large multinational companies that pay regular dividends such as Unilever, Diageo, and GlaxoSmithKline. The dividends these kinds of companies pay could help us beat negative interest rates.

For the more adventurous, we could add some growth stocks to a portfolio. These can be more volatile, but the gains can be higher. For example, shares in Rightmove have risen about 70% over the last three years. That kind of return would certainly help us beat negative interest rates.

Another option to consider is funds and investment trusts. These offer diversified exposure to shares, meaning we don’t have to pick individual shares.

Of course, it’s a good idea to keep some cash on hand for emergencies. Investing all our money is not sensible, as the capital is at risk.

However, in a world of negative interest rates, investing looks to be the way forward.

The post What are negative interest rates and how can I protect myself? appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Unilever, Diageo, GlaxoSmithKline, and Rightmove. The Motley Fool UK has recommended Diageo, GlaxoSmithKline, Rightmove, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020