Interest Rates and the future...

Today I read that the Bank of England committee are to meeting to discuss what the rate of interest is to be set at.

At the time of writing 30-year Gilts are paying 1.3%p.a., so as it says on the tin, if you buy a 30-year Gilt you will get a return of 1.3% p.a., great hey, roll out the champagne!

The problem though is that if we take inflation at 2%pa then essentially that would be a negative return of 0.7%pa.

The collective wisdom of the crowd (the market) is telling you that there is no risk of inflation of 2% for the next 30 years, now someone will be wrong, but at this stage there is either too much money in circulation to meet the demand of investment, potentially no growth or even deflation. None of these are a good position to be in unless you are a borrower of capital and in a deflation world would you buy an asset that is going down in value with borrowed money, ask a Japanese citizen.
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The challenge as always is to allocate capital to investments that have the potential to rise in value, and one such example is to own companies that can maintain and grow their profits over long periods of time.
So, ask yourself this question, do you know what you own and what is its growth potential within your pension and investment portfolio?
 

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