You will have to agree with me that having multiple sources of income is the best way to beat inflation, as you work and earn, the earnings have to back into the market so that it could pull other income in. Tying money down is not the best way to combat inflation. Read on and see ways your savings could work as you work..
1 PLIGHT OF SAVERS
The search for income has intensified in recent years as it has hit home that low growth and low interest rates are here to stay in the developed world. In the UK, the Bank of England base rate has been at an historic low of just 0.5% since March 2009 – and there’s no indication that this will change any time soon.
Darius McDermott, managing director of Chelsea Financial Services, the investment fund broker, says: “Anyone still in cash should really consider taking on a little more risk to get better returns: £10,000 left in cash when interest rates first went to 0.5% is only worth £10,234* today. If the money had been moved to the average UK equity income fund it would be worth £25,669.”
2 GREATER RISK = GREATER REWARD?
Justin Modray, founder of Candid Financial Advice, a recently-launched independent financial adviser (IFA), warns that, aside from shopping around for a better savings account, there’s no magical way of earning more interest: a higher income means taking on greater risk.
“If you can’t afford to lose money then taking risk is probably a bad idea, but if you can afford to risk some money, or already have a portfolio of investments, then other sources of income stack up well versus cash.
3 CAPITAL PROTECTION
This doesn’t mean to say that, by steppingup the risk scale, you could end up losing your shirt: protecting capital is an essential part of any fund manager’s role.
However, equity income managers tend to be more cautious in their choice of stocks, typically looking for those that will provide steady capital growth rather than stellar returns.
4 LOWER VOLATILITY
A company paying a good and rising dividend often communicates strong financial well being, since dividends ultimately come from earnings and profits. And they are less likely to be dumped in difficult markets, because the income helps to compensate investors for any loss of capital value. In short, income investing produces an overall total return that is less volatile than the equity market as a whole.
5 SUPERIOR PERFORMANCE
In fact, investing using income as a guide to investment selection almost invariably produces long-term out-performance. Just look at the total returns from the FTSE 100 and FTSE All- Share indices compared with the IMA UK Equity Income index. Over one, three and five-year periods, stocks designed to generate an income have outperformed
6 INFLATION PROTECTION
If your capital doesn’t keep pace with inflation, then its value is clearly being eroded. In other words, it is losing value in real terms. Inflation has not been much of an issue in recent years, but over the longer term it is likely to rise again.