The Bank of England's decision to cut interest rates has opened a wealth of opportunities and dilemmas for investors. And there is more to come.
The Bank's rate cut, a 0.25 percentage point trim to five per cent, is the first in more than four years, but is also widely expected to be the first in a series that will change the attractiveness of various assets for savers and investors looking for long-term returns.
A lower interest rate environment usually demands a rethink of savings and investment strategies, though experts are cautious about suggesting a wholesale shift on the basis of last week's decision.
If you're thinking about a bit of a refresh, or wondering whether it is worth shifting some of your cash savings ahead of a potentially less attractive low-interest rate regime, here are some steps you can take to reposition your money to take advantage of cuts to come.
ONE: Bag a good savings rate and consider gilts
Cash savings accounts and gilts have grown in popularity while interest rates have been high as the income they generate has soared to well above five per cent. As rates fall, both are likely to become less lucrative and equities may start to prove a better alternative.
But there is still a place for cash and gilts and it might be worth banking good deals while they are around.
Cash savings are risk free, so if you will need the money in the short term, they are a great option.
You can lock in higher rates for longer with a fixed-term savings account. If rates continue to fall, fixed-term deals will also become less generous. You can get as high as 5.17 on cash Isa rates from savings providers Plum.
But beware these top rates are likely to come down, and rival Chip saw its cash Isa drop to 4.84 per cent, as it tracks the base rate. Money is protected up to £85,000 under the Financial Services Compensation Scheme.
> Check This is Money's five of the best cash Isas
The best non-Isa easy-access savings accounts are from Cahoot and Ulster Bank and offer 5.2 per cent interest. If you are willing to fix, you can get a rate of five per cent on a two-year deal with RCI Bank UK or GB Bank.
There are also attractive yields available on short-dated government gilts if you buy now. When you purchase a gilt, you are effectively lending money to the Government, which gives you a regular payment in return, plus your money back at the end of a term.
Short-dated gilts are close to the end of their term. Dzmitry Lipski, of DIY investment platform Interactive Investor, suggests buying the iShares UK Gilts 0–5 year exchange traded fund to get access to some of these gilts. 'The yield is almost 4 per cent and the charge 0.07 per cent,' he says.
TWO: The sectors that could benefit
With cash set to become less attractive in coming months if cuts continue, buying shares or funds is an option for those looking for greater returns.
Laith Khalaf, of fund supermarket AJ Bell, says that over time, share prices should benefit from lower rates because they reduce the cost of debt for companies whose shares you are buying.
Remember that you are taking on risk when buying shares as the value of investments can go down.
You can reduce the risk by buying funds instead of individual shares, which spreads your money among a wider selection of companies.
Investment experts believe companies in areas such as housebuilding – which was hit hard by rising mortgage rates and will benefit from a Labour Government with much higher housebuilding targets – could be worth looking at, as well as funds that invest in property and infrastructure.
Alex Watts, fund analyst at interactive investor, likes TR Property Trust, which is yielding five per cent and has a third of its property in the UK and two-thirds in Europe.
Ben Ritchie, at fund manager abrdn, suggests housebuilder Taylor Wimpey as an individual share that will do well. 'Falling rates feed into lower mortgage rates, stimulating demand and support rising house prices,' he says. Taylor Wimpey shares are broadly flat.
He also suggests buying into suppliers such as Marshalls, which manufactures concrete, and Genuit, which supplies drainage and ventilation pipes. Emma Bird, head of investment trust research at Winterflood, suggests backing Impact Healthcare, a property fund investing in UK care homes.
If it makes the cash payments it is expected to make to investors, the return will be the equivalent of over eight per cent a year – more than you would get in the bank.
Smaller companies are also tipped to do well as interest rates fall. These are more likely to be UK-focused and to benefit from a return to spending as customers have more cash in their pockets.
John Husselbee, at fund management group Liontrust, says smaller companies will be 'notable beneficiaries' from lower rates, having been sold by many investors due to worries over debt.
Alex Watts, at interactive, recommends the Amati UK Listed Smaller Companies Fund as one way to gain access to such companies. This active fund focuses on 65 to 75 small UK stocks, with some of its top holdings including defence contractor QinetiQ and communications group Gamma.
You could also consider a cheap tracker fund that mirrors the performance of the FTSE 250 smaller companies market, such as those offered by iShares and Vanguard.
THREE: React calmly to market moves
Interest rates can have a significant impact on stock markets, especially if central banks don't act in the way investors are expecting. On Friday, stock markets worldwide suffered on the back of fears the US Federal Reserve had not acted fast enough to cut rates, putting US growth at risk.
However, where interest rates have followed the expected trajectory, they rarely trigger market-wide swings.
'Interest rates are just one factor driving investment performance, so basing investment decisions on interest rates alone is unlikely to be wise,' warns James Norton, head of retirement and investments at fund provider Vanguard. So don't assume everything about your portfolio needs to be changed because rates are falling.
Last week's rate cut was widely expected and stock markets are already priced on the assumption there are a few more cuts to come.
Laith Khalaf, of AJ Bell, says that, unlike the aggressive rate hikes that brought us up to 5.25 per cent, a gentle slope to four per cent rates – as is predicted – will not be a total gamechanger.
'Moving from 0.25 to 5.25 per cent was a total sea change but if interest rates fall back to say four per cent in the longer term that's not so much of a positive shock to the system,' he says. 'The effect on markets will be marginal, possibly even negligible.'
FOUR: Keep watch on your portfolio
The direction of travel for interest rates is likely set but the speed is not. Economist Benjamin Jones at Invesco says this rate-cutting cycle is likely to be 'shallow with intermittent rather than regular cuts as inflationary pressures remain a clear and present danger'.
It may be some time till rates are a more standard four per cent.
At a later point in the rate-cutting cycle, other assets aside from housebuilders and infrastructure should start to benefit. These include retail and leisure businesses, which will profit once customers have more money in their pockets due to falling inflation and a smaller amount of their money going into expensive mortgages.
This will take a while, but those with patience could consider getting in early to companies that will benefit. Ben Ritchie, at abrdn, suggests Pets at Home and Hollywood Bowl as two individual companies that will do well as discretionary spending rises.
It is also vital to keep an eye on your cash savings as rates continue to fall. Shop around regularly and be ready to change provider.
Check your portfolio is balanced and you are happy with the level of risk, especially if you're moving more from cash savings.
Falling interest rates should also cut the cost of loans but doesn't necessarily mean it's the best time to take on more debt.
'Consumers should not view an interest rate cut as a green light to rush out and spend on big ticket items,' warns Alice Haine at investment group Bestinvest.
Compare the best DIY investing platforms and stocks & shares Isas
Investing online is simple, cheap and can be done from your computer, tablet or phone at a time and place that suits you.
When it comes to choosing a DIY investing platform, stocks & shares Isa or a general investing account, the range of options might seem overwhelming.
Every provider has a slightly different offering, charging more or less for trading or holding shares and giving access to a different range of stocks, funds and investment trusts.
When weighing up the right one for you, it's important to to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.
To help you compare the best investment accounts, we've crunched the facts and pulled together a comprehensive guide to choosing the best and cheapest investing account for you.
We highlight the main players in the table below but would advise doing your own research and considering the points in our full guide linked here.
>> This is Money's full guide to the best investing platforms and Isas
Platforms featured below are independently selected by This is Money’s specialist journalists. If you open an account using links which have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.
| Admin charge | Charges notes | Fund dealing | Standard share, trust, ETF dealing | Regular investing | Dividend reinvestment | ||
|---|---|---|---|---|---|---|---|
| AJ Bell* | 0.25% | Max £3.50 per month for shares, trusts, ETFs. | £1.50 | £5 | £1.50 | £1.50 per deal | More details |
| Bestinvest* | 0.40% (0.2% for ready made portfolios) | Account fee cut to 0.2% for ready made investments | Free | £4.95 | Free for funds | Free for income funds | More details |
| Charles Stanley Direct* | 0.35% | No platform fee on shares if a trade in that month and annual max of £240 | Free | £11.50 | n/a | n/a | More details |
| Fidelity* | 0.35% on funds | £7.50 per month up to £25,000 or 0.35% with regular savings plan. | Free | £7.50 | Free funds £1.50 shares, trusts ETFs | £1.50 | More details |
| Hargreaves Lansdown* | 0.45% | Capped at £45 for shares, trusts, ETFs | Free | £11.95 | £1.50 | 1% (£1 min, £10 max) | More details |
| Interactive Investor* | £4.99 per month under £50k, £11.99 above, £10 extra for Sipp | Free trade worth £3.99 per month (does not apply to £4.99 plan) | £3.99 | £3.99 | Free | £0.99 | More details |
| iWeb | £100 one-off fee (waived until Dec 2024) | £5 | £5 | n/a | 2%, max £5 | More details | |
| Accounts that have some limits but attractive offers | |||||||
| Etoro* No investment funds or Sipp | Free | Investment account offers stocks and ETFs. Beware high risk CFDs. | Not available | Free | n/a | n/a | More details |
| Trading 212* | Free | Investment account offers stocks and ETFs. Beware high risk CFDs. | Not available | Free | n/a | Free | More details |
| Freetrade* No investment funds | Basic account free, Standard with Isa £4.99, Plus £9.99 | Freetrade Plus with more investments and Sipp is £9.99/month inc. Isa fee | No funds | Free | n/a | n/a | More details |
| Vanguard Only Vanguard's own products | 0.15% | Only Vanguard funds | Free | Free only Vanguard ETFs | Free | n/a | More details |
| (Source: ThisisMoney.co.uk July 2024. Admin % charge may be levied monthly or quarterly | |||||||
