Preparing for whatever economic ups and downs might be ahead

The volatility in global markets over the past four years has tested the nerves of even the most experienced investors, making it a difficult time for individuals who rely on income from investments for some or all of their needs. The search for inflation-beating income is forcing many investors to move money out of cash accounts and into investment funds, with the aim of achieving a rising level of income.

 

How should you decide between growth and income investments? Much will depend on your investment time frame and what you need the investment to provide for you. When considering the answer, it’s important not to ignore the concept of ‘total return’. Total return looks to combine income with capital growth to achieve the best overall return. One way of achieving this is with equity income funds, where investors saving for retirement could reinvest the income until the day they retire and then elect to have it paid to them instead, producing an income without the costs of completely overhauling their portfolio.

Index-linked investments, such as certain gilts and National Savings certificates, can protect against inflation eroding capital and income, but in today’s low-inflation world investors need to compare the total return to that available from an ordinary gilt or savings account.

Balance between the different asset types

Wealthier investors, who can cope with a little fluctuation in their income and capital, could look to include corporate bonds, property and dividend-paying shares. Bonds and property traditionally pay higher yields than equity income shares, but equities have provided the greatest opportunity for capital growth and growth of income. A balance between the different asset types should provide the best chance for a reasonable and growing income.

Income-paying equity, bond and property funds can be a good investment for those investing for capital growth too, as it’s simple to arrange for income to be reinvested.

Whatever your preference, if you hold a variety of investments, both growth and income, you should be better prepared for whatever economic ups and downs might be ahead of you. As your financial situation changes over time, you should also be prepared to make the necessary adjustments to your investment portfolio and switch from growth assets to income as your investment needs change.

Levels and bases of and reliefs from taxation are subject to legislative change and their value depends on the individual circumstances of the investor. The value of your investments and income can go down as well as up and you may get back less than you invested.