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Rates of Return
The Bank of England influences interest rates by issuing bank notes at a particular rate of return; the current rate set by the Bank is 5% and is reviewable each month.
When this rate is increased, money leaves the financial system as investors seek to take advantage of the increased return. When the rate is lowered, money is preserved within the financial system as individuals seek to borrow money at a lower rate or, alternatively, to place their money in other investments that will increase their return.
Certainly the Bank of England would be one of the safest places to store ones wealth and, if this is the case, the issue of risk to the investment is negligible. From this benchmark an individual is able to extrapolate and determine an acceptable rate of return for other types of investment.
Currently, a UK bank will offer a rate of between 6% and 7.5% for a term deposit of between one and three years. This reflects the slightly increased risk of an ordinary bank as opposed to the bastion of security that is the Bank of England.
An individual may alternatively choose to invest their money in the stock market. The ferocious surge of the bull market which existed until the end of 2007 saw the stock market allow investors gigantic returns depending on their investment timing, but generally provided about 14% p.a. return over the long term.
Of course, this kind of investment has had its own catastrophic incidents, as has occurred in the past 12 months to date. The most recent events plaguing the stock market are useful in demonstrating the risk / reward principle of investment. While the return on stock investment may at times prove to be incredibly high, the risk is far greater than that of the ownership of a bank note issued by the Bank of England.
Another option available to investors is the investment in business and commerce. This is typically a far more risky enterprise than even the stock market (if that is at all possible), and so would demand a return to reflect this risk. In addition, investments within SIPPs are becoming increasingly popular as an option open to investors. Dependent on numerous factors, often out of an operators control, the return on investment in business as a rule of thumb ought to be commensurate with the subject matter involved, but generally is not worth the risk of investing in small business unless a return of at least 30% is reflected in either market research or the financial statements of an existing business.
For larger macro commercial ventures, risk capital still demands a similar rate of return but again the subject matter of the exercise needs to be taken into consideration as the investment, for example in a large scale transport company with guaranteed contractual income, is far more secure than that of a take-away food outlet in a an already saturated market of a local shopping centre.
The indestructibility of land has historically proven to be of value to the investor, due to the expansion of the UK population and the further concentration of residential areas. Demand for housing is particularly persistent in urban areas and has steadily increased over time. Generally, returns on property reflect a return over the long term of approximately 10% however, like the stock market, have experienced their various dips and surges.
At particular times these various investment markets can react in relative sympathy for each other, but at other times they prove to be at odds with one another when money leaves one market to be invested in another. This flight to quality (or lack thereof) is typical of a global market place whose destiny lies in the collective hands of millions and millions of people. SIPP advice or more information about self invested personal pensions can be found at sipps.org.uk.