For those in retirement a major issue in recent years has been the perpetual decline in bank interest rates. For example, in 2007 it was quite possible to take out a 5 year fixed interest deposit bond and receive a gross income of 7% per annum. By 2013 this has reduced to 3%. For those relying on this income for their standard of living, that is a 57% drop in income, ignoring the effects of inflation.
As independent financial advisers, these low interest rates have brought to us an unprecedented amount of retirees, who are naturally cautious investors, to seek advice on how they can increase income without taking undue risk.
So is it possible to create a good income without losing sleep at night?
The answer lies in one’s ability to accept that any investment involving risk will have short term fluctuations in value, but as time increases the probability increases that your investments are likely to outperform money on deposit.
For a typical client looking for a cautious investment at present, we would typically recommend an investment portfolio of 38% in high yielding corporate bonds, 25% in Commercial Property and 37% in high dividend equities.
With respect to income, high yield corporate bonds are typically producing a gross income of the order of 6% at present. Commercial property typically is producing an income of the order of 3.5%. Whilst the income level on both these asset classes can vary over time, it has tended to be very stable.
For equities income is more variable, but does tend to rise with inflation over the longer term. Typically a high income portfolio of equities can produce an income of the order of 4.5% at present.
Taking these asset classes together, therefore, it is possible to produce a gross income, within an ISA for example, in excess of 5%pa, or outside of an ISA of the order of 4.4%pa.
The greatest source of risk lies in the short term variation in capital value. All of the above asset classes are susceptible to changing economic conditions, and it is inevitable that economic shocks will happen in the future. For example, with the failure of the world’s banking system in October 2008, clients who held a portfolio similar to the above could have experienced capital falls of up to 25% in their investments.
However, the key point here is that the capital falls would have been short-lived, and most importantly, the income which was created during that period would have been relatively unaffected. Therefore anyone enjoying the income from these investments would have seen the value of their investments return to the previous level by the summer of 2009.
Investing with some form of risk therefore comes down to an investor’s personality and capacity to withstand loss. If they are able to cope with the worry of short term volatility in their investments and retain their investments through a crisis, then over the longer term this type of investment would be worth considering. For those unable to deal with the worry of falling investments then they should avoid risk and settle for the lower returns available on deposit.
Lakeside Offices
The Old Cattle Market
Porthleven Rd
Helston TR13 0SR
afwm.co.uk
Tel: 01326 564950
Atkins Ferrie Wealth Management is a trading style of AFWM Ltd. AFWM Ltd is an appointed representative of Evans Falco LLP which is authorised and regulated by the Financial Conduct Authority. The value of units can fall as well as rise, past performance is not a reliable indicator of future results.
