Getting a return on savings in the current market is tough. Interest rates in virtually all countries across the world are at all-time lows and the rates of return offered to savings account holders and bond holders are close to zero. This is set against around two per cent inflation as a headline figure and probably substantially more as measured on the ground. All in all it means bond holders and savers alike are losing out even though they are diligently putting their money away.
Still there are countries where you can get a better return. Australia’s base interest rate is above three per cent and so there is room to provide a larger return to savers. Other banks with slightly higher sovereign risk are offering similar returns. What you do need to be careful of when saving out of the country is the possibility of currency depreciation, since you will need to convert your base currency into the yielding currency in order to get the returns. In the case of Australia yields are three per cent plus, and fortunately the currency has held relatively steady in the last year or so, actually appreciating by an additional two or three per cent over that term. Yet gains in the currency are not guaranteed, nor is any stability. It is easy to lose a whole year’s worth of interest in a couple of days if the currency has a volatile time on the markets.
Still, for those with a keen eye on the foreign exchange markets, there is always money to be made every day by speculating on the movements of various currencies against each other. Major currencies include the US dollar, the Euro, the British Pound, the Japanese Yen and others. On a normal day a one percent move between major currencies is common and if you are correct on the direction of the move you can benefit accordingly. You can also amplify the moves by trading on margin which can give you a much greater return on a one percent move on the underlying currency, as compared to your initial capital. This works by only paying a proportion of the currency being changed and returning the full amount at the end of the trade. The amount paid in advance is called a margin payment, and margin requirements can vary from broker to broker. If the currency moves substantially against you may find yourself getting a margin call, this is a requirement on your part to top up the margin to cover the adverse move. Whilst trading on margin cannot be recommended for everyone, it is a way to put more money to work than you actually have in the markets by leveraging your position. Both losses and profits will then be amplified against your initial deposit.
Another way to increase yield is to invest in the stock markets. However whilst this certainly would have worked well for the six months or so, the stock markets have put on such stellar gains in that time, there could be a pull back and the risk of loss going forward. Over a multi year term markets usually appreciate, especially in a loose monetary environment, but volatility is always present. The Thai stock market has increased 60% in little over eight months, and many other markets have put on gains that are disproportionately large as compared to both inflation and the increase in money supply. Thus finding yield with this type of instrument is risky but can be very rewarding. You can use the same kind of margin trading techniques for stocks as well as for currency trading, but again be aware that whilst profits will be amplified, potential losses will be also.
In a similar way to the stock markets, commodity trading can provide some protection against inflation and it can be argued that these trades will more readily correlate with the loss of monetary value. However just as there is speculation in the stock markets, the prices of commodities are also prone to immense speculation. Commodities most commonly traded are gold, silver, oil, corn, copper etc. Currently gold has garnished investor and speculator demand as a safe haven currency of sorts, far outstripping its normal demand in the real market which is traditionally for electronics, jewelry and the like. Gold has risen 700 per cent in the last eight or so years, once again far outstripping the actual monetary losses that inflation would be responsible for.
Thus investing in gold may work out to be a long term winner, but may also invite a great deal of risk. With a typical 10 to 20 year bull and bear market gold could fall a long way from the recent levels of 1500 USD per ounce. Thus the market is very volatile and not without risk. It may be better to look at commodities that are not the flavor of the month with investors and which have less speculative aspects to their prices.
The local property market may present some ideal yield providing opportunities. This is in spite of the fact that currently property yields are at a decade long low with rentals typically at three per cent of property prices. That is to say you would need someone to rent your property for 33 years or more to pay for it in full. However, even at the current low rates property ownership provides a higher yield than bank deposits and the prices are still appreciating, meaning that on top of any rental income you can still benefit from price rises should they continue to occur in the future. Things to look out for are the cost of transactions when buying and selling such as stamp duties and business taxes, maintenance costs such as juristic fees or simply renovation and upkeep of a property, occupation rates such that your property is filled and always receiving a rental income, and possible topping out near term of property prices due to them hitting an affordability ceiling.
You should be able to get transaction costs back in a year or so and after this the yield is yours to enjoy.