Preparing for successful income investment

Income investors and self-funded retirees have faced a daunting task for some years now, which the pandemic has drawn into sharper focus:  how to generate an income while controlling for risk amid record low interest rates and high market volatility.

For the foreseeable future we will continue to live under the cloud of ongoing pandemic risk. The extended lockdowns prompted by Delta-variant have provided a timely reminder of how volatile the post-COVID environment will be.

History tells us that sooner or later everything that’s old is new again. We note that a pandemic, while rare, is not without precedent. Similarly, major market swings are also not without precedent and the responses from government and regulators are from a very well-worn manual.

Historically, government and regulatory policy responses to volatility have been focussed on key drivers of our economy including employment, inflation, economic growth and confidence.

There are lessons here for today’s income investors. Amidst all the noise in markets and media, investors need to ensure their own portfolios are built on tried-and-true playbooks. Focussing on protecting against volatility has placed investors in the best position for success for decades. Consider the economic tumult of the 1970s as the world lurched towards open markets. This period of volatility was marked by high unemployment, high inflation, a stock market crash and rising oil prices.  The response globally was focussed policy supporting economic growth, boosting productivity, controlling inflation and rebuilding employment.

A five-year bull-market through the 1980s preceded the Black Monday stock market crash. History tells us that no single factor was the key to the panic, and many placed the blame for peak market panic on algorithm-driven share trading models in key stock exchanges. The subsequent ‘recession we had to have’ of the early 1990s was eventually resolved locally through policy to control inflation, reduce interest rates and boost employment.

Fast forward to 2008 and we experienced the ‘Black Swan’ economic event of the GFC, with market volatility rivalling the Great Depression in parts of the world. The Australian experience was marked by a 50% fall in the ASX which took a decade to claw back. Our government response to the GFC was to maintain economic growth through fiscal stimulus and maintain confidence in the banking system through a deposit guarantee. The Reserve Bank did its part to stimulate economic growth ultimately by cutting interest rates. Of course, these have stayed low since, placing great stress on income investors and driving the ‘hunt for yield’ which has punctuated the last decade.

In 2020, the impact of COVID-19 on global markets saw an almost immediate 40% fall in shares combined with economic and societal disruption of an immense scale.  Fortunately, the rebound was swift, with equities rebounding in months rather than years.  The response also was from the same well-known playbook with focussed measures to restore confidence, protect jobs and maintain economic growth.

Protecting against volatility should always be central in the playbook of any income investor. After all, while volatility may at times be dormant, history tells us it is never far away. Investors need to maintain focus on the things that matter most in portfolios to protect against volatility while meeting their income and lifestyle requirements. The performance profile of selected assets must align with the profile you are seeking to achieve. The risk profile of the assets must match your own risk appetite. In a low-rate environment, it can be tempting to move ‘up the risk curve’ into assets which don’t align with the delivery of low volatility income right across the cycle.  Shifting focus away from controlling risk may bring short term income or outcomes, but ultimately opens portfolios to volatility which can be devastating for retirement aspirations.

*With seven decades of experience, La Trobe Financial continues to provide low-volatility, inflation-responsive income solutions for investors.  Our portfolio accounts focus on low-volatility monthly income for investors with variable rates of return set monthly.  Our Peer to Peer offering allows investors to build their own portfolio of investments with the income, duration and diversification profile to meet personal investment objectives.

Now with $13 billion in assets under management including $7 billion in our award-winning credit fund, La Trobe Financial continues to be a proven investment partner for c.70,000 investors across Australia and around the world.

Past performance is not a reliable indicator of future performance.

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