Low Interest Rates Dilemma

Low Interest Rates Dilemma

Low interest rates will create a dilemma. Will you accept a low return in order to protect your principal? Will you take on higher risk to achieve higher return?

Pay attention to costs

In a low interest environment, investing expenses will have a larger impact in eroding your gain. For example, a mutual fund with an expense ratio of 1% of net asset value each year which uses the expense for marketing and paying the employees. This 1% will have a big bite into your return if your return is only 3% than if the return is at 10%. At 10% of return, it is only 1% of your gain. At 3%, a third of your return goes to expenses. Prior to investing in a mutual fund, consider all fees and expenses as well as its risks which will be highlighted in the fund prospectus. Digest the fund prospectus because it is your money.

Real Return

If inflation is low, even when you are earning based on low interest rate, your real return will not suffer. Real return is what your money earns after taking inflation into account. Based on 2015 Singapore’s inflation rate which is exceptionally low, the real return should produce the same return during high inflation years.

Own dividend paying stocks
You should not just buy highest yielding stocks for dividends alone because high yield stocks will have a certain level of risk. However, as part of portfolio management, you need to have some defenders which we will recommend the blue chip stocks with a yield of 4% and above.

Buy high-yield debt
High yield debt is also known as “junk” bonds. There is a reason why they are called junk because you are buying debts of companies which are on the brink of insolvency or with credit issues. You need a high return to justify for the high risk and bet that the companies can survive long enough to pay back your principal. Alternatively, you can consider owning a slice of this junk bond market through an ETF can serve good way to increase your dividend yield as part of your overall investment portfolio.

Invest in foreign stocks and bonds
Foreign companies and governments present the same credit issues and challenges. You need to analyse before parting your money. Speak to us if you require assistance to construct a suitable portfolio based on your risk appetite. All investing strategy will require you to measure your ability to suffer loss in a downturn. You need to question what are the factors which can blindside your judgement, taking into consideration low interest rates and rising inflation.

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