Cameron Watson
Training and development manager at Craigs Investment Partners
www.craigsip.com
One of the biggest challenges currently facing investors is low interest rates. With inflation at rock bottom levels, this challenge may be with us for some time yet. Below we outline strategies to deal with this situation.
1. Be realistic about returns
Respondents to a recent investor survey believed on average that a nine percent return was ‘medium’ and 15 percent was ‘fairly high’. With today’s low interest rates, these expectations look unrealistic to us without taking on very high levels of risk.
In our view, it is prudent to set objectives and invest with modest return expectations. Investment returns are linked to inflation, growth and interest rates, all of which are pointing to mid to single digit returns over coming years.
2. Understand risk, especially those new to investing
Returns from a balanced portfolio are not like returns from the bank. They go up and down. Do not expect a straight line. The degree of volatility will depend largely on how a portfolio is split between lower-risk income assets (cash and bonds) and higher-risk growth assets (property and shares).
Understanding this is especially important for new investors. In the wake of low interest rates, we notice an increasing number of people diversifying their portfolios away from bank deposits to shares in search of higher returns. Returns over coming years are not only likely to be lower, but also more volatile.
3. Build a portfolio that generates sustainable income
We believe a key benefit of building a portfolio of direct assets is obtaining access to the underlying interest and dividend cashflows from the investments. Income is not fixed and can fall if interest rates decline or dividends are reduced, but it is significantly less volatile than movements in share and bond prices. As such, income provides somewhat of a cushion during periods of market volatility.
4. Be prepared to supplement income with capital withdrawals
The decline we have seen in interest rates means that relying only on income generated by a portfolio can result in a significant decline in income.
We believe investors should be prepared to reduce capital to help supplement their retirement income. This does not sit well with many investors who believe capital should be passed on to the next generation intact. This may have been possible when interest rates were eight percent or more, but those days have passed.
Cam Watson is the Training and Development Manager at Craigs Investment Partners. His disclosure statement is available free of charge on request. This is general information only.
Visit www.craigsip.com for more information.
