Generating income in a lowest rate world

If you rely on your savings to supplement your living costs, or provide you with an income in retirement, you may be finding it difficult to make ends meet at the moment.
This is not surprising, as the cost of living has increased dramatically over the past ten years.
At the same time, interest rates have fallen to unprecedented low levels – along with the income you can receive from traditional sources of income such as bank deposit accounts and bonds.
The chart below shows the annual income from a £10,000 90-day notice bank deposit account over the past fifteen years. You can see it has dropped from a peak of £420 in 2008 to only £73 now – a fall of over . And this is before the effect of inflation is taken into account:over the same period (2008-2014), using the government’s favored measure of inflation (the consumer price index) the value of money fell by over 20%, meaning that the real value of this income is even less.

How an you find different ways of delivering income?

An alternative might be to invest in stocks and shares that can deliver income through dividends, either by holding them directly or through an Equity Income fund. This can be attractive, although many investors find market volatility off putting, as it can change both the value of their investment and the income it generates.

One other approach is to take a much wider view and consider other potential sources of income from a broader range of asset classes and capital structures, across many different countries and regions, to provide diversification.

Diversification makes sense

The table below shows the annualised returns from a range of different asset classes over the past 10 years, covering different types of equities, government and company bonds, commodities, property and cash.

You can see from the ‘patchwork quilt’ effect that making a decision on which asset class to hold is tricky – the top performer changes regularly and the returns are very volatile. investors who are over committed to one asset class run the risk of disproportionate losses should that asset class under-perform.

Taking a diversified approach means that a drop in the value of one asset may then be offset by increases in other asset classes, leading to smoother overall performance.

You should not use past performance as a reliable indicator of future performance. It should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise. You may not get back the amount you originally invested.

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