If you buy the 30-year inflation protected gilt today and hold it to maturity you are guaranteed to lose 24% of your real capital. Where should you put your money instead?
"The risks associated with being wrong in the nearer term far outweigh the benefits of being right in the longer term"
Where should you put your money instead? Equities? Probably not. Having the large majority of a balanced or retirement portfolio in equities would clearly be reckless.
Although it might well turn out in time to be the right thing to do, the risks associated with being wrong in the nearer term far outweigh the benefits of being right in the longer term, particularly for those a few years into retirement.
The answer, in my opinion, is to allocate a decent proportion of a balanced fund to 'specialist investments', or listed investment vehicles or trusts that provide something useful in relation to both equities and bonds.
An example would be REITs, which have income streams generally more stable than those of equities – rental income tends to be stable and costs do not change very much – and yields that are higher than bonds and more index linked – one can still find REITs that are yielding north of 5% and unlike bond coupons, rental income tends to rise with inflation.
Other examples would include renewable energy funds, asset leasing vehicles, peer-to-peer lending funds. Traditionally it would have been banks and leasing companies that provided the finance for such projects.
Now the expertise, for example, to buy an aircraft and lease it to an airline, exists outside the mainstream financial sector. And the stock market provides the connection to shareholders, many of them small investors to whom such opportunities would not previously been open.
Of course, they are not risk free. Renewable energy companies are always subject to the risk that the Chancellor could renege on agreed RPI-linked tariffs that provide the stability to cash flows. And there is always market risk that could drive down prices in the face of a recession or market rout.
The first of these risks can be addressed by investing in a number of these vehicles, the latter by having the strength of mind to hang on – if the cashflows are ok, prices would eventually recover.
Published in Investment Week
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.