Investment opportunities are looking bleak – so what do you do?

Where is safety for investors in a world of surging inflation and rising interests? These are deeply worrying times for many reasons, and when people get worried they seek safe havens for their savings.

Even before the horrible invasion of Ukraine people were worried, for inflation was already eating into most people’s real incomes. Now there is the prospect of a really tough summer ahead. So what do you do?

There are no easy answers, but a few things have become clearer in the past few weeks. One is that the long period of cheap money will draw to a close. It already is happening, as the central banks around the world start to increase interest rates and end quantitative easing, that ugly expression used to describe the way in which they pumped money through the banking system into the economy.

There have been a few increases in interest rates already and we will hear much more of this in the months ahead. But already the markets have started to push up rates far faster than the central banks. Just last week the yield on 10-year UK government securities, gilts, pushed through 2 per cent in inter-day trading. That is the highest since 2015. In December last year it was below 0.8 per cent.

Much the same is happening in other countries. In the US the equivalent yield is just under 3 per cent, the highest since early 2018, and in Germany just under 1 per cent, the highest since 2014. Yields in Germany were actually negative in early March.

This is a sea change sweeping across the world. None of us can know how far it will go, but the widespread assumption of the financial markets is that this movement has hardly begun. We will all feel the effect in higher mortgage costs. In the US 30-year mortgage rates are now over 5 per cent, the highest for 11 years.

UK rates are also climbing. The consumer magazine Which? reports that for some borrowers, rates have doubled since last October. This must affect house prices. Estate agents Knight Frank recently produced a report that forecast that house price growth in the UK would come down to 5 per cent this year and only 1 per cent in 2023.

In social terms that would be welcome because homes would start to become more affordable for first-time buyers. But it would be a sharp change from the double-digit price increases in recent years, and it would mean that instead of home ownership being a sure-fire way to make money, homes would be valued for what they really are: somewhere decent to live.

So if someone is looking for a safe investment, most residential property probably still qualifies – but no longer offers easy profits and some buyers may incur losses. What else is there?

Well, let’s look at something that is no longer safe. For the past five years and more there was a rule of thumb for investors, particularly in the US. It was to buy on the dips. If share prices went down, particularly prices of the US tech giants, you should buy, for the next peak was almost invariably higher. So in January this year Apple became the first company in the world to be worth $3 trillion. But the price did not stay there. It is still a wonderful enterprise, but it is now worth “only” $2.65 trillion.

Other companies, notably Netflix, have fared much worse. Its share price has already been weak since late last year, but then last week there was the news that subscriber numbers were falling. The share price took another plunge and is now down by nearly two-thirds in the year to date. There have been sharp but less dramatic declines in the value of the other US tech companies, including Microsoft, Alphabet, the parent company of Google, and particularly Meta, the new name for Facebook.

To be clear, these are still amazing companies. But if you bought their shares at the beginning of the year you would have lost a bundle of money.

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So what do you do? As I say, there is no simple answer. What is worth saying, though, is that these worrying times should be a spur for people to do the things they have been wondering about but have not got round to doing. It is a sort of financial spring cleaning exercise. So it is sorting out pensions – will your employer chip in more? It is trying to increase one’s pay.

The latest numbers from the Office for National Statistics show total earnings up 5.4 per cent year on year, less than inflation but in normal circumstances pretty good. It is not spending on things you don’t need.

As for investment, it is worth remembering that the key to building wealth is steady, incremental saving, spreading risks but having different types of holding, and relying on the magic of compound interest to bump up the total over the years. The median family wealth in the UK is now £302,500. The average is even higher, around £576,000.

Even in these days of scary inflation – and they are scary – the old rules still work.