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