The findings of the Schroders Global Investors Study 2016 (i) paint a picture of a world in which investment expectations are stuck in a bygone era.
The survey reports that on average Australians would like to receive an income of 9% from their private investments. With interest rates now at 1.5%, achieving a return of 9% is a near impossibility.
Looking further afield, the 20,000 respondents from 28 countries indicated a similar desired income from investments of 9.1% on average; unrealistic given current average stock market yield of 3.8% globally.
We see the low interest rate environment as a mid to long term phenomenon – so returns on investments for the foreseeable future will be well below long term averages and certainly well below the hopes and expectations of many investors.
Investors need to be realistic about future income
Schroders provided an excellent summary of what people need to know about this new reality in a statement accompanying the survey.
“Until relatively recently, there had been a sense the exceptionally loose monetary policy adopted in response to the global financial crisis was a temporary phenomenon.
Sooner or later, according to the consensus, economic growth would pick up, interest rates would rise and some form of normality – in the sense, at least, of a pre-crisis policy environment – would return.
Eight years on though, such hopes appear increasingly forlorn.
Interest rates may have been tentatively raised in the US but, with inflation still very low around the world, few countries seem in any hurry to follow the Federal Reserve’s lead. Indeed, Japanese and eurozone policymakers remain firmly in easing mode.”
With interest rates at a new low, many investors look set to be disappointed
Fundamentally, people invest to create income streams so that they can enjoy the life they want for themselves and their family, now and in the future. There are different elements involved in building a “pot of money” to generate the income – from accumulating the capital to protecting the capital, minimising the risks and maximising the opportunities.
For high income earners, prolonging your income-earning work after the average retirement age of 57.9 years is one successful way of prospering in a low interest environment.
Amongst the senior executives we work with it is this second half of their career that is critical to long-term financial wellbeing.
In our experience, the longer you work at something you enjoy, the better financially prepared you are for your retirement and the happier you will be, regardless of the prevailing market conditions.