Investing for income
May 2009
Oscar Wilde once said ’It is better to have a secure income than to be fascinating’.
Perhaps he had an inkling that the greatest headache for investors relying on their savings is inflation. Like a worm in an apple, it steadily eats away at the real value of your money.
How big a threat is inflation?
Aside from the double digit inflation of the 1970’s, and the period of deflation that the UK is currently experiencing, long-term price stability is the rule rather than the exception. Why then is the government so obsessed with meeting its low inflation targets? There are some very good reasons.
Markets are global
Throughout the greater part of the 20th century, across the globe, rampant inflation has been the downfall of more than a few economies. Its effects may not last long but, like a tidal wave, they can be devastating.
Increasingly the economies of the world are closely interlinked. A shift in one market tends to affect all markets, for good or ill. A prime example of this is the recent turmoil in the financial markets which has spread like a domino effect around the world – most economies have felt its effects.
So what has all this got to do with bonds? It can be summed up in one word – demographics. And this comes in two flavours: numbers and wealth.
Demographics drive change
The UK population is living longer. In 1990, according to the Office of National Statistics (ONS), 25% of the population was recorded as being at retirement age. By 2010, it is estimated that it will have risen to 30%.
That represents millions more people living on a fixed income from their pensions and investments.
The wealth of the population is usually highest for those aged 60-69. After that, as a general rule, we tend to get steadily poorer as we spend our accumulated assets.
Mature investment decisions
As investors mature their needs change. They tend to be looking for income rather than growth.
Bonds, or fixed interest securities, as they are more formally known, have the ability to provide a defined rate over the term of an investment which can be, though is not always, above that of the high street. See our article A rate on which you can rely for more information.
Outlook for the future
No individual can hope to turn back the tide of inflation. Governments too may find the causes beyond their control – such as the rising price of crude oil.
But these days there is, at least, a greater understanding of those causes. Today, UK base rates are controlled by the Bank of England, which has helped bring the money supply, and by turn, inflation, under control.
