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Creating income from investments

As interest rates fall, investors and savers with cash on deposit withdraw their cash, and seek alternative uses for it.

Louis Coke


Over recent years, creating a sustainable level of income from an investment portfolio has become more challenging. This is primarily due to interest rates. As interest rates fall, investors and savers with cash on deposit withdraw their cash, and seek alternative uses for it.

The textbook economics idea here is that the money withdrawn from bank accounts will be spent in the economy on goods and services. However, whilst this happened to a degree, a lot of this cash ended up looking for a home elsewhere in the investment universe i.e. the holders of the cash did not want to spend it, they wanted to invest it to generate an income.

So, where did it go? Well, first of all, investors looked at fixed rate bonds with banks and building societies. Then they looked to the bond market, effectively lending their money to companies and governments in exchange for a return. After some time, rates on fixed deposits fell significantly and the price of bonds rose significantly, partly due to the sheer volume of investors buying the assets.

Next on the list was property, so we saw large inflows to property assets. The income yield on property has therefore fallen as, like with the bond market, the sheer weight of money means that prices go up, and rental yields have not grown at the same pace.

After filling up with property, investors then looked to shares (or equities) that pay good dividends. This trend is still ongoing, although you may hear some of the more popular high dividend shares now being referred to as ‘bond proxies’.

So if you are looking for income now, where do you go? Some investors choose to supplement their income by taking ‘capital drawdowns’, i.e. eroding their capital by a certain amount each month in order to artificially give themselves an income. This is completely understandable in rising markets, but in poor markets this has the effect of accelerating the decline in portfolio value. In the industry this is referred to as ‘pound cost ravaging’.

We believe there is a far better alternative. Something to consider is that the investment and finance world has changed significantly over the last decade. As such there are now a number of investment strategies that can be invested in by Discretionary fund managers (such as Charles Stanley) which can create income from an investment portfolio. These investments include ‘alternative’ assets such as asset leasing, loans and other related activities. Traditionally the realm of banks, these assets are increasingly available to investment management firms dealing with the general public (‘retail investors’ in industry speak).

By utilising these new investments as part of a diversified portfolio, we can achieve relatively attractive levels of income without having to invest in some of the areas noted above and pay high prices. We also add diversification to our portfolio- adding more sources of potential return for our clients.

If you would like to speak to us about creating an income from your investments, please contact me.

This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. If you are unsure of the suitability of your investment please seek professional advice.

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