Where should investors look for income?
Investors searching for income in today's environment face a difficult dilemma: place their savings in "safe" assets which will be eroded by inflation over time or move into higher yielding assets which come with a higher degree of risk.
We compared the yields available before the financial crisis to today. The only asset class currently offering higher yields than before the start of the financial crisis is equities, with many of the traditional asset classes sought by savers now offering below inflation returns.
Many savers are losing out as a result of low interest rates and have no choice but to take more risk or to accept an income that will be eroded by inflation. It is a dilemma facing all investors who are searching for yield.
It's our view that central banks around the world are unlikely to start raising interest rates any time soon which means the pressure on yields, which are at historic lows, are here to stay.
For investors who are willing to take more risk in their hunt for yield, here are three pointers to keep in mind:
If you are going to move away from traditional sources of income, diversification is your ally. Investors tend to diversify when they are investing for capital growth, why not do that for income sources as well? By spreading your savings across asset classes such as bonds, equities, real estate and cash you gain the benefits of diversification and are not relying on just one source of income.
Be aware of the risks
Some products available on the high street offer savers a higher level of income but it is essential you go into these with your eyes open. For example, permanent interest bearing shares (PIBs), offered by building societies, pay a fixed rate of interest. Unlike a deposit, PIBS are not protected by the Financial Services Compensation Scheme (FSCS) for deposits as they are stock exchange instruments.
Consider if you need help
Diversification remains a cornerstone of a sensible investment strategy but with all the options available, deciding on the right combination of asset classes for the environment can be difficult. For those who don't have the time or the expertise to monitor changes in markets, it may make sense to leave the balance between bonds, equities and other asset classes to the experts. Investors can choose between a range of options such as a multi-asset income fund or a portfolio of funds focused on income.
Eugene Philalithis, portfolio manager of Fidelity Multi Asset Income Fund.
This article was written for our sister website Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).