According to the Bank of England, ‘real’ interest rates may not rise much above 1%, even in the longer term. If the Bank is correct about this, where can investors find income right now?
The Bank of England asked two key questions last December – Firstly: how far have ‘real’ interest rates (that’s after allowing for erosion by inflation) fallen globally? And second: how likely are they to stay at their current low levels? The Bank argued that the fall in real interest rates over the past 30 years has been driven by a mixture of changes including an aging population and increased levels of savings, especially in emerging markets. They thought that these trends would persist for some time and couldn’t see interest rates rising much for some time.
If the Bank turns out to be right, what are the implications for people who need income from their savings and investments, especially those in retirement?
Both cash and fixed interest securities look unpromising at the moment – yields are at or near all time lows. This clearly doesn’t mean that there is no place for holding cash and bonds as part of a diversified investment portfolio, but it does mean that investors should be looking for income from shares and property as well.
Dividends from equities (company shares) have traditionally provided the answer for investors requiring a reasonably dependable income. This involves them giving up some of the capital security provided by cash deposits or even some fixed interest securities. The value of their capital in shares can go down as well as up, and the dividends aren’t guaranteed either. But with equities there is also the prospect of some possible long-term capital growth, which can be very important in boosting investment returns over the years. The difference between income and capital growth is that whilst the income is usually reasonably regular, capital gains tend to come in spurts, sometimes with years of no gain, or even losses, followed by sharp up-turns.
Diversifying your investment portfolio
Most people cannot just live on the income from their investments; it is necessary to draw on capital gains as well and live on the total returns from their investments.
That means having a diversified investment portfolio. Part could be invested in equities to provide both income and (hopefully) long-term capital growth. But some of the portfolio should be in cash and fixed interest securities to help smooth out returns and to provide an ’emergency fund’ of safe investments to draw on in turbulent times. The total returns you get from such a portfolio should provide a sustainable stream of spendable income.
The Bank of England specialists expect interest rates to stay “lower for longer”; that will mean investors changing their investment strategy to meet these unprecedented conditions.
Pembroke’s unique investment proposition can help – contact us today.
Please Note: The value of your savings and investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
Also inside our latest Pembroke Winter Newsletter:
- Does pension beat property?
- LISA reappears after a summer redesign
- Is your family financially protected?
- What is a £5,000 a year pension worth?
- Two wrongs and a right – tax evasion, avoidance and planning
- A third quarter investment lesson