2021 will pose unique challenges for investors, especially for those relying on a fixed income for retirement. Interest rates around the world are low, and this low-rate environment isn’t going away anytime soon.
Currently, we’re in the early recovery phase of the global business cycle. Unemployment rates are still high, and demand for goods is growing. Also, to backstop their economies, central banks used monetary stimulus to help prop up consumer spending and trade. As a result of all these economic factors, both short-term and long-term interest rates are low, and they may stay that way for the next couple of years.
How do low rates impact investors?
With low-interest rates, traditional fixed-income investments such as bonds, treasuries, money market funds, and GICs (guaranteed investment contracts) offer lower yields. On the other hand, equities are favoured by many investors. Because rates are low, the cost of borrowing drops, enabling businesses to finance growth with cheaper debt. And with lower returns on bonds, investors turn to equities for higher returns.
Challenges of investing in a low-interest-rate environment
The main challenge for many investors right now is finding a way to continue earning healthy returns without taking on too much risk. A low-rate environment, combined with the uncertainty of investing during a global recession, forces investors to shift gears and look for
innovative investments in order to maintain portfolio performance.
In any low-rate environment, inflation risk is a major problem. With bonds, treasuries, and other traditional fixed-income investments offering very low yields right now, you risk earning less than the rate of inflation (normally two percent in Canada).
While the equities may offer higher returns, they also come with more risk. This isn’t attractive for investors nearing or already in retirement. With an equity-heavy portfolio, investors would experience more day to day volatility which may impact the investment income they receive to support their needs.
How to navigate the current environment
There are solutions, even for risk-averse investors. At Bellwether, we believe that innovation is the answer to uncertainty. By diversifying outside of Canada, exploring alternative investments, and staying anchored to your individual investment objectives and risk appetite, you can weather the uncertainty and depressed yields.
Here are some of the investment opportunities we see in 2021:
North American equities with robust dividend income potential
By diversifying your portfolio with stocks outside of Canada, you can focus on only the very best of the best. Our thoroughly researched North American dividend growth strategy is tailored to the expectations of affluent investors that appreciate a disciplined approach to investing. We pick the strongest stocks from our database of 3,900 US and 400 Canadian stocks—only those with solid balance sheets and proven earnings and dividend growth make the cut.
Global real estate and infrastructure
Utilities, roads, data centres, and other types of private equity investments can be used to generate an income while reducing the risk of investing in public market equities. Bellwether's Global Real Estate and Infrastructure private equity strategy invests in private real estate and infrastructure assets around the globe.
Alternative fixed income
Another avenue is the niche private lending market. Mortgage-backed securities, supply chain financing, and other credit market investment vehicles tend to have lower risks than equities but higher returns than traditional fixed income. Bellwether's Alternative Fixed Income strategy gives individual investors access to these types of niche private lending opportunities—which are typically only available to larger institutional investors.
How to take advantage of what 2021 has to offer
At Bellwether, we’re able to offer low-cost access to investments that are normally only available to larger institutions, including alternative and niche investment options. Our portfolio managers and family wealth advisors act in the best interest of our clients, working to create tailored financial solutions designed to provide a stable income, even during uncertain times.