Solving for income
Using Market Insights to achieve better outcomes
Since 2004, J.P. Morgan has produced market insights to help individual investors understand and make their way through rapidly shifting markets.
Today, with the general population living longer than ever, we believe that providing a reliable source of income throughout an investor’s life in an ever changing investment environment is vital. “solving for income” takes a look at the role of income and how it will benefit investors by keeping it as a key investment objective.
1. CASH ISN’T ALWAYS KING
TOP: Cash pays less
Investors often think of cash as a safe haven. Many investors shy away from the stock market, unwilling to take on the added risk. However, as interest rates have remained low globally, returns on cash are still low and even negative in real terms for many countries. Even if policy normalizes—when central banks raise interest rates—rates will rise, but only slowly and may remain negative for some time in real terms as inflation is also likely to pick up.
2. PLAN ON LIVING A LONG TIME
LEFT: We are living longer
Thanks to advancements in medicine, people are living longer and healthier lives. This chart shows that the share of population in retirement age will rise sharply across Asia over time.
RIGHT: The benefits of saving and investing early
It is important for investors to start saving and investing early in order to maximize the benefits of compounding. This chart illustrates three different scenarios: one in which the investor starts savings early, but keeps those savings in cash only; one in which the investor both saves and invests in financial assets early; and one in which the investor starts later, but still allocates these savings to financial assets. The investor who started early and invested in a well-balanced portfolio is far better prepared for retirement than those who started late or invested only in cash.
3. THE IMPORTANCE OF INCOME
The Importance of income
The total return on an investment typically consists of two components: price appreciation and income, which usually is paid in the form of coupons or dividends. This income stream can offset the risk of price declines and serve as a critical buffer for portfolios. While these payments do not imply or guarantee a return, they can boost the total return.
Fixed income investors use yields to gauge the income stream they can expect from their investments. As interest rates remain low, these streams have been getting smaller for many years, making it more difficult to find readily accessible sources of income in the fixed income world.
4. NOT JUST FIXED INCOME
LEFT: Not only fixed income
Post the global financial crisis and COVID-19 pandemic, developed markets’ government bond yields have fallen to low levels and look set to remain so. As a result, investors are moving beyond government bonds in search of higher yields.
Fixed income often comes first to mind as a source of income, but dividends also offer a yield payout to investors. In addition to paying a higher yield, high dividend equities have tended to provide a better risk-adjusted return than broader equity indices over the long term.
5. HARNESS THE POWER OF DIVIDENDS AND COMPOUNDING
The power of dividends and compounding
Harnessing the power of compounding can greatly impact investor returns. Placing an initial $100 into the MSCI World Index in 1970 would have given an investor nearly $3,000 today if we merely looked at the price returns.
The compounding effect could greatly increase these returns if the same investor reinvested the dividends paid out by this equity market over time. Investing the same $100 in the MSCI World Index in 1970, but reinvesting the dividends received, would have grown this $100 to over $14,000 today.
6. A RANGE OF SOLUTIONS
A range of investments available
In the search for income, there are a broad range of solutions available to investors. The universe of income-paying assets is not limited to fixed income or equity products.
Alternatives and other riskier assets can compensate for the higher risks they carry with higher returns, and often pay investors higher yields to both attract new capital and make it worth investors’ while to tie up their money in these typically longer-duration investments.
A diversified portfolio allocated across many different assets can help mitigate risk while generating income, whether we are heading into a period of difficult or good investment performance.