How investors can build a sustainable income in an inflationary market
Over recent months, rising inflation has hit our back pockets more and more each day, while our hard-earned dollar is getting us less than it used to.
The last 12 months have seen Aussies grapple with terms like inflation, interest rates and volatility, along with plenty of numbers and percentages, as we try to make sense of what’s happening in the financial world.
Tim Montague-Jones, Head of Australian Equities Research at ASR Wealth Advisers, tells OverSixty that during periods of inflation, like the one we’re experiencing currently, we can actually become poorer despite our bank balances staying the same.
“In simplistic terms, if you had $100,000 in savings, and you have 10 percent inflation, then that $10,000 is just evaporating out of your bank account each year,” he explains.
“But in reality, what it means is you go into the shop and everything just costs more money, your dollar buys less. So you become poorer.”
If we do nothing or invest in generally considered safe options such as bonds, government securities or term deposits, our money can also lose value.
“If cash value goes down 10 percent a year, you lose 10 percent. Now, if you go and put it in a bond, you’ll be lucky to get a four or five percent return,” Montague-Jones says.
“So what people talk about is real rates, which means the difference between inflation and what you can return from an investment, a cash account for example is unable to offer a higher return than inflation, meaning your money is going down in value every year.
“If people do nothing in such conditions, they will lose wealth.”
“You’re seeing higher prices and lower economic growth, and it just erodes people’s savings. “And it hits the hardest for people who aren’t employed, who don’t have a salary because they’re not going to get wage inflation.”
As unstable as everything might seem, Montague-Jones says it is possible to still get a return on your investments and ensure your hard-earned cash isn’t losing all of its value.
“In reality, there’s no safe place to put your money to offset inflation, but there are certain strategies you can take to try and mitigate that inflation,” he says.
Income portfolios, like the one offered by ASR Wealth Advisers, are created by analysts who scan the market for high quality stocks that are expected to achieve a steady return on investment and therefore may provide you with a sustainable income in addition to your other income sources.”
“We have put together what we call our income portfolio. I have a team of analysts, and what we do is we are looking for businesses which pay what we call a ‘defensive’ cash flow,” he explains.
“So we’re not trying to buy a company which is going to double in price, we’re not looking for that capital growth. What we’re looking for is a company with that annual cash flow.”
In times like these, Montague-Jones says it comes down to investing in defensive stocks.
This refers to buying stock in businesses that return consistent profits each year, rather than those that are high risk and high reward. Examples of defensive sectors of the market include infrastructure, utilities, supermarkets and healthcare.
“What we like is electricity distribution, gas pipelines, toll roads, port facilities, airports. We like what we call defensive infrastructure, utilities, things that are expected to continue doing well and are resilient to an economic cycle,” Montague-Jones explains.
“Because we will continue to have economic cycles, what we want to do is just have that cash flow, so we’re not going to really look at the share price from month to month, what we’re going to be looking at is the consistency of that cash flow through time.
“And that’s what we’ve helped our investors to get exposure to through our income portfolio.”
As a result of its consistent returns, the income portfolio from ASR Wealth Advisers has a low turnover or a ‘set and forget’ nature, which Montague-Jones says allows some investors to essentially live off the income generated by the portfolio.
“What we like about our income stocks is of the nature of its cash flow, even through an economic cycle, we still wake up, we turn the lights on, you turn the gas on, businesses still function, life goes on and so does income from the portfolio,” he says.
In terms of strategies investors can use during inflation, Montague-Jones says that there aren’t many places where your money can go without incurring some kind of loss. Even areas that have done well in the past, such as property, offshore assets and precious metals aren’t generally offering the same kinds of returns as defensive stocks.
“And I do think you have just got to invest in infrastructure assets, such as a utility business churning out cash flow, is where you need to hide at the moment until the smoke clears and we can work out where to go,” he says.
“Longer term, we still like commodities, we like green metals. We particularly like copper, there’s a big structural shift happening into electric vehicles and a move away from combustion vehicles,” Montague-Jones explains.
“And there’s a big boom for lithium, copper, nickel and aluminium, so we like to get more speculative investors to invest in these commodities.”
With over 20 years of experience in investment management, Montague-Jones has personally adopted some successful strategies over the years, including having a “get rich slow” mindset.
“I like to set and forget, to own a business and then just let it do what it does, which is generate income.
“And that’s what it’s all about. It’s not get rich quick, it’s get rich slow.
“It’s about that compound return, year in year out. If you can make nine or ten percent every year, you compound that over 10 or 20 years, you’ll have better chances to become extremely wealthy, rather than trying to make 30 percent this year then lose 30 percent next year.
“So it’s about get rich slow and about income; it’s a key ingredient to becoming wealthy.”
To find out more and receive a free report detailing how you can see attractive growth on your investment, head here.
This is a sponsored article produced in partnership with AAIGL.
Atlantic Pacific Securities Pty Limited ABN 72 135 187 085 trading as ASR Wealth Advisers CAR 339207 of Trilogy Group Australia Pty Ltd ABN 80 078 111 654 AFSL 218770 and Amalgamated Australian Investment Solutions Pty Ltd ABN 61 123 680 106 AFSL 31461 distributes a wide range of its investment research reports through Australian Stock Report Pty Ltd ABN 94 106 863 978 AFSL 301682. ASR Wealth Advisers and Australian Stock Report Pty Ltd are part of Amalgamated Australian Investment Group Limited ABN 81 140 208 288.
General Advice Warning: Any views and recommendations expressed in this article are limited to general advice only without taking into account your individual objectives, financial situation or needs. You should consider whether this information is appropriate for you in light of your personal circumstances and seek professional investment advice. Past performance is not a reliable indicator of future performance. Investment in securities involves risk. Share prices rise and fall. The payment of dividends and the return of capital are not guaranteed.