The bad news is we have to find ways of funding that retirement and longevity. But low interest rates and bond yields – the traditional sources of income – aren’t sufficient to sustain a proper living.
Changing life plans and priorities will mean we encounter varying income needs and goals throughout our life, and, when investing, certain innate behavioural traits will influence our decision-making.
With interest rates at historic lows, investors need to consider diversifying across asset classes and internationally to obtain the desired levels of income. Equities, emerging market (EM) debt and high-yield corporate bonds could help generate a real yield, albeit at some risk to capital.
Weak domestic growth and unorthodox monetary policies have pushed down core bond yields and kept bank account cash rates low. Investors are likely to find it difficult to generate a ‘decent’ real income from many sources previously considered reliable and ‘safe’. Dividends from equity holdings provide a stable and consistent source of income.
Emerging market debt provides a high yield. Many EM economies have lower government debt levels than G7 countries but offer higher yields, providing attractive opportunities for investors.
The investable universe of EM debt has grown significantly in recent years. Active management is key to seeking out the attractive opportunities and avoiding those that are most at risk.
Flows into EM debt also dramatically changed over the course of 2016, with macroeconomic data appearing stronger now than in the first few months of the year.
Given the yields available from both the US and European high-yield sector, and the current low level of defaults, some investors may prefer high yield over investment-grade bonds.
While there are concerns over the high-yield energy sector, the US high-yield market is highly diversified by sector and includes access to many other quality names. Most companies can still comfortably afford their interest payments.
In this current environment, investors need to think beyond traditional sources of income to beat inflation, and if appropriate consider multi-asset investing. This may mean taking on more risk, but a well-diversified portfolio can help reduce volatility.
Equity dividends can be an important source of income and have historically been very stable, so it may be worth thinking about EM and high-yield debt as part of a portfolio as they can offer attractive yields relative to core bonds.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.