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How I Cope With Low Returns

I have some good news and some bad news.

Interest rates are on the rise. But it could be a while before they return to anything that even resembles normal. There are just too many things conspiring against central bankers to let that happen any time soon.

Low interest rates can be a blessing for borrowers. Homeowners, for example, will be delighted that their monthly mortgage repayments are easily affordable.

But there is another side.

Savers have been disadvantaged because they need to accept that the interest they earn on their bank deposits will be lower. Much lower.

There was a time when $1 million in the bank could have been enough to see someone through their retirement.

The good old days

When interest rates were at 10%, a retirement pot could have generated enough income for someone to live out their days, comfortably….

….There might even have been some interest left over at the end of each year to plough back into the nest egg.

That could have meant even more interest the following year. Oh, the joys of compounding. But not now.

Some of us might even have to chip away at our lump sum to help make ends meet. But when we do that, it could mean less interest income next time around. It could start a downward spiral that could result in poverty.

So what can we do?

We need to, firstly, accept that future returns from our investments could be lower than before. Only by accepting reality can we start to take the right steps to move forward.

Behaving like an ostrich is really not very helpful. It’s probably the worst thing that we can do. If we want to have more money at the month rather than more month at the end of our money, then we should act now.

This doesn’t mean we have to take unnecessary risks or drastic measures to boost the returns on our investment…..

 

……But it does mean that we might have to make adjustments to our expected returns. That might mean spending a little less and putting away a little more every month. Investing is, after all, delayed spending.

Timing the market

Some people might be tempted pull money out of the market in the hope of jumping back in when there is a correction. A correction can be an opportunity to put some “oomph” into our returns.

But corrections are notoriously difficult to predict. The last significant one was nearly two years’ ago.

The next drop could be this week or we may have to wait a while for it to happen again. And all the while that we are waiting, our money that could have been earning something. Money left on the sidelines is earning us nothing.

Getting it right

There is something else ….

…When we try to time the market, we are banking on getting it right, not just once but twice. We will have to be right about calling the top of the market.  We will then have to be right about calling the bottom of the market.

But as Peter Lynch once pointed out: “Nobody rings a bell at the top and bottom of the market”. Wouldn’t it be great if someone did though?

As I see it, we have to accept things as they are.

Save the world

Quantitative Easing was introduced to save the world from a financial collapse. Some might argue that it has made matters worse. They might have a point.

But what’s done is done. We are where we are. So, we have to work with what we’ve got.

Begin by taking a long hard look at our portfolios. Do we have the right mix of value, growth and income shares? Too much of the latter could lower our returns. But too much of the first two could introduce a bit too much risk.

Getting the balance right could mean the difference between a happy retirement and one where we are continually counting the pennies.

What is undeniable, though, is that Quantitative Easing has gone on for far longer than anyone had ever expected. It has also introduced some unintended consequences.

What next?

Let me help you navigate those unintended consequences by selecting the right shares for your portfolio.

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A version of this article first appeared in Take Stock Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.