1st September 2014 by The Harried House Hunter
Since the recovery from the global banking crisis in 2008 and apart from the odd stumble along the path investors have generally been very well rewarded for taking the risks associated with both equity and bond investment.
However, since the shocks of 2008 and 2011 investors have, quite rightly, been much more wary of returns, particularly from equity growth stocks and many investors have moved from a pure growth strategy to one more aligned to a mixture of capital growth and income. This approach to investment is often termed a ‘real return’ strategy. Typically this combines growth shares or funds, shares which have a dividend yield and bonds which provide a yield also. Combined these have provided very decent returns for investors over the last few years and many investors have become used to stable and growing income levels from their portfolios which have been positioned in this way.
Over the last three years the iShare UK Dividend Exchange Traded Fund has delivered over fifty eight percent to investors versus around forty eight percent from the FTSE 100 Index of leading UK shares.
This approach appears to satisfy investors on several fronts, stable and growing income, a portfolio which nominally carries less risk than a pure equity based portfolio and which offers decent diversification over various asset classes.
Therefore, many investors have become reliant on yield but it is getting harder and harder to find. As share prices have risen, dividend yields have fallen. Not just for shares but also for many high-yield bonds also. As the economy recovers high-yield, corporate and goverment bond yields are falling. This is largely because investors are becoming more convinced that interest rate rises are not yet on the cards and therefore the long dated bonds where capital values have risen over ten per cent this year are in very dangerous territory.
Other asset classes which produce income such as property funds have also become highly crowded and yields have fallen as investors seek alternative sources of income.
All in all a bit of a perfect storm for those approaching or actually in retirement. Particularly for investors seeking to avoid purchasing an annuity under the new incoming rules, this is now potentially posing two real issues.
Investors either need to take on more risk to continue to achieve the higher yields to which they have become accustomed or to buy shares which do not deliver the yields required for achieving a particular income, but which should do more to protect their portfolio’s nominal capital value.
As a wealth manager, this is the type of quandary we assist clients with every day. Our advice will always hinge around capital preservation over the longer term, particularly for those moving into retirement and who have less time or capability to rebuild capital values in the event of losses. We counsel that it is always better to avoid too much risk and to accept less income today than have to tolerate huge losses tomorrow.
Lee Robertson is a Chartered Wealth Manager and CEO at www.investmentquorum.com