Six Safe Havens In A Storm

If you're worried by shaky stock markets, but would still like to earn high returns, then check out these secure shelters for your cash.

As happens almost every year without fail, the UK stock market has taken something of a dive. This summer, the big panic has been caused by US mortgage borrowers defaulting on their repayments, causing a collapse in the value of mortgage bonds and other fancy financial instruments in this market.

Since hitting a seven-year intra-day high of 6754.1 on 13 July, the FTSE 100 index (which measures the value of the one hundred largest firms listed on the London Stock Exchange's main market) has fallen to 5945.9 as I write, a fall of more than a tenth (11.9%) in under five weeks. As US investor and author John Rothchild once remarked:

'Nasty bear markets happen every six and a half years. Smaller declines of 10 per cent, called 'corrections', happen every two years or so. Taken together, these minor and major setbacks have produced losses in thirty-three years out of the past one hundred, making investors unhappy roughly one-third of the time.'

In two decades of equity investing, I've seen dozens of these periodical shakeouts and two fully fledged bear markets: the crash of 1987 and the 2000-03 slump. In my experience, investors tend to do one of three things when share prices dive:

1. Give up, cash in and head for the exits, nursing what profits they have left. After having their fingers burned, some never again return to equity investing.

2. Do nothing. After all, investing in companies is a long-term game -- it's a marathon, not a sprint, so why rush into any hasty decisions?

3. Go bargain hunting, buying cheap shares that have become even cheaper, potentially increasing investors' future returns.

As it happens, I've gone for the third option, adding new money to my portfolio and buying into large, well-managed companies which will weather this summer's storm. However, if recent stock-market shenanigans have left you feeling distinctly nervous, then you may prefer to keep your spare funds away from shares for a while. In which case, I give you six shelters for your cash: safe havens which also offer decent returns at almost no risk!

1. Paying down your mortgage

For the sake of argument, let's assume that you pay an annual interest rate of 6% on your mortgage and can overpay or make lump-sum repayments without penalty. In effect, reducing your mortgage by £1,000 is equivalent to earning a tax-free yearly return of 6%, which equals to pre-tax rate of 7.5% for basic-rate (20%) taxpayers and a handsome 10% a year for higher-rate (40%) taxpayers.

(Please check with your lender before going down this route, or you may be penalised for reducing your mortgage debt if you have a special-rate deal.)

2. Halifax/Bank of Scotland Children's Regular Saver

As I revealed in Earn 12% A Year (With Strings Attached), this savings account for children pays an ultra-high interest rate of 10% AER. However, you can only deposit between £10 and £100 a month into this account for twelve months. Hence, your total investment is £1,200 over the course of a year, so the maximum interest you could earn would be £64.05, according to our savings calculator. Still, as most children don't pay tax, at least this will be tax free in most cases.

3. Cash Individual Savings Accounts (ISAs)

A cash ISA is simply a savings account into which you can save up to £3,000 per tax year and earn tax-free interest. Here's more information on cash ISAs and here's a list of the highest interest rates on offer at present, courtesy of Fool.co.uk's independent, unbiased savings wizard:

Best Buy easy-access cash ISAs

(for new money, not transfers; excludes notice accounts, fixed-rate and fixed-term accounts)

4. Index-linked Savings Certificates from National Savings & Investments (NS&I)

NS&I (alias the government's piggybank) sells savings bonds that are guaranteed to beat inflation, because they pay a premium on top of the Retail Prices Index (RPI). What's more, the following returns are tax free, so they appear particularly tasty to higher-rate taxpayers:

The RPI slipped to 3.8% in July, making the current interest rate 5.15% a year before tax, which amounts to 6.44% a year for basic-rate taxpayers and a tidy 8.58% a year for 40% taxpayers.

5. Yorkshire BS Regular Saver

This is superior to most regular-savings accounts, as it is open to new and existing customers and pays a yearly interest rate over 7% (7.1% AER before tax, to be precise). Furthermore, you can save between £10 and £500 a month for a year, and make one withdrawal without penalty. Over the course of a year, £500 a month would produce total interest of £228.33, which falls to £182.66 after basic-rate tax or £137 after higher-rate tax.

6. Guaranteed income bonds (GIBs)

Guaranteed income bonds are savings bonds sold by certain insurance companies. They pay a fixed rate of interest and guarantee to return your capital in full when the term is up. The interest from these solid savings bonds is paid net of basic-rate tax, so they are popular with senior savers. Here are the latest Best Buys for a lump sum of £20,000 --- all from specialist insurer Pinnacle; with data provided by Baronworth.co.uk:

So, there you have it: six safe ports in which to weather future financial storms. It's nice to earn high -- even double-digit -- returns during times of trouble!

More: Find a superior savings account today | Take advantage of stock-market falls with this cheap, simple investment | Is The Crisis Over?