If you are retired and living off your pension plus the income from your capital, you will know how difficult it has been for the last 10 years to get a decent income from your capital without putting your capital at risk, because interest rates have been so low. In financial jargon, trying to get a decent income from your capital is called “The search for yield”. Interest rates are low as a matter of Central Bank policy; they have been suppressed. It’s not a natural condition. If the “free” market had been left to decide, interest rates would be much higher. You would be able to get a much higher interest on your deposits.
We live in a world of “ZIRP” (Zero Interest Rate Policy) and “NIRP” (Negative Interest Rate Policy), and let me add my own, “TWIRP” (Totally Wacky Interest Rate Policy). Central Banks have got us into a right old bind and there isn’t any painless way out. ZIRP and NIRP have caused big distortions in both bond and equity markets, with bonds especially looking like they are in a super bubble. Truly a case of, “The Emperor has no clothes.” I suggest a Day of Reckoning is coming our way.
To add salt to the wound, UK expats have just suffered a significant and swift blow to their income, as the pound has fallen sharply as a result of Brexit; the pound sterling pension now buys significantly less. It can go the other way of course and may still do, but I wouldn’t expect that to turn around any time soon. Whether it does or it doesn’t is entirely out of your hands, so you can’t do anything about it.
What you can do something about, is to see if you can make up the shortfall by getting a better return on your capital. If you have a portfolio of investments, it is likely being managed by some professional fund manager. I think that in these markets, in order to make money you have to think outside of the box. You have to do something different. In general, I would say that large financial institutions are not good at doing this. Fund Managers need the safety of the herd and they would rather be wrong together than be right on their own. Going out on a limb risks the salary and the bonus, and may then impair future job prospects. Who wants to employ a wild card?
Take gold for example, which I wrote about in my previous article back in April. Most fund managers don’t have any meaningful allocation to it and probably never will. Check your portfolio to see how much gold you have in it. I’d be surprised if it’s more than 1% and that’s not going to help you; the words “chocolate” and “fireguard” come to mind. Since the beginning of the year, gold is up around 30% and gold shares up by near 100%.
Sometimes small can be beautiful. At Felicitas we don’t have to conform to institutional “asset allocation” rules, we prefer to be those that think “outside of the box”. If you would like to find out more of our current thinking, contact us for a second opinion on your portfolio, or subscribe to receive my regular, “Perspectives” investment newsletter then please see our contact details.
Roger Hardaker is a Financial Consultant with Felicitas Management Group. He holds the UK Diploma in Financial Advice and the UK Investment Management Certificate. Please call 26 600 213 to arrange a free consultation on your existing arrangements.