The current higher-for-longer interest rate environment makes cash and cash equivalents attractive as investors can earn a good return without volatility in the value of their investments, making it a safer option for conservative investors. However, given the negative impact of inflation on one’s purchasing power, there’s value for investors in Asia to consider "income investing".
While cash deposits might offer immediate and low-risk returns, they often fall short in providing the potential for higher long-term growth and capital appreciation that other investment products can offer.
Income investing, which includes bonds, dividend-paying stocks, and income-generating funds, can help investors achieve a more balanced and diversified portfolio. It can offer higher returns than traditional savings accounts and create a steady income stream, which is especially important in a region where households typically allocate a significant portion of their assets to cash.
According to a study¹, many Asian investors have high allocations to money market instruments and bank deposits, believing these are safer and more secure. In fact, about 40% of households in the region allocate their assets to cash.
However, after the Global Financial Crisis, around 2015 to 2016, interest rates dropped to almost zero. During these low-interest years, people started looking for higher income from different sources instead of just bank deposits. This led to the introduction of various income products offering attractive returns.
Now, even though interest rates are higher, earning a regular and higher income from investments remains a priority among Asian investors. Income investing is still relevant because it offers potentially higher returns than cash deposits and provides opportunities for growth. For instance, bond values might rise as interest rates fall, or equity markets might go up.
However, income products come with risks and no guarantees, so these might not suit everyone. It's crucial to educate investors about balancing risk, growth, and income to meet their financial goals.
The Better Income approach focuses on understanding an investor's goals and the risks associated with different levels of income.
This is how it looks for different investors:
Retirees: Seniors usually prefer less risk and aim to preserve capital while seeking a decent income above cash rates (e.g., 4-5% per year).
Younger investors: They might have a higher risk appetite, looking to grow their wealth and willing to sacrifice some income for higher growth potential.
It’s important to note that “income” is not “interest” and is not risk-free. Investors should understand the risks in their portfolios and the potential returns. Generally, higher yields come with higher risks and more volatility. "Better income" is about achieving stable and consistent yields through various market cycles, not just the highest income level.
Investors should thoroughly understand a particular source of income and their risk profiles to achieve stable income and make their capital last. This approach helps balance the need for income with the risk levels an investor is comfortable with, aiming for stability and consistency in returns.
Strike a balance in life, and most importantly, in your portfolio!
A balanced asset allocation usually provides investors with a smoother investment experience and perhaps helps protect them from selling equities after they have already fallen in price. If you believe that we are likely to enter a period of further economic weakness, we’re likely to be reminded of the importance of bonds in a portfolio.
Better income – Aim for higher, not the highest
If we focus too much on chasing the highest yield and upfront yield generation, we could suffer from early capital depletion and miss the total return opportunity towards the later stages of the investment journey.
Cash is king?
Amid volatile market conditions and higher interest rates, seeking security by burying your savings in a deposit account is tempting. As the saying goes, “cash is king”. Or is it?
Better Income
A “Better Income” approach seeks to understand an investor’s investment objective alongside the underlying risk of certain levels of income generation. “Better” income may not refer to the highest income level but the stability and consistency of reasonably higher yields generated throughout various market cycles.
By adopting the Better Income approach, investors can tailor their portfolios to meet their financial goals while managing risk effectively. This strategy ensures a more secure and prosperous financial future, balancing the goal for higher returns with the need for stability and growth.
1 Manulife Investment Management commissioned NielsenIQ to conduct an online survey of 2,000 people from Hong Kong, Taiwan, Indonesia, and Malaysia – 500 people from each market – who are aged 20 to 60 between 25 August and 6 September 2022. The research aims to assess people’s retirement readiness and aspirations, including savings and investments, and lifestyles and family issues they consider when planning for retirement.
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