BREXIT FOR INVESTORS
– TIME TO GET ACTIVE
Seneca Investment Managers ' hard hitting, deep thinking Chief Investment Officer, Peter Elston, has been weighing up the potential effects of Brexit on investment returns.
While it is far from clear what its long term impact will be, Britain’ s vote to leave the EU has shone a light on the growth problems in general that face the global economy. Indeed, global growth has been disappointing for some time now, having never really regained the levels seen prior to the global financial crisis. From 2003 to 2007, economic growth for the largest developed and emerging economies averaged 3.9 %. Since 2011, it has averaged just 1.6 %. The reasons for this are complex, but it is certainly possible that lower growth is here to stay.
Lower growth of course means that one should expect lower investment returns. Add in rising longevity and for savers you have a toxic combination. In days gone by one may have only needed to make a savings pot last 10 years and could have expected real returns from a typical balanced fund in the order of 5 % per annum. This would have equated to an annual withdrawal of £ 12,950( rising with inflation over the 10 years) on a pot of £ 100,000( see table).
Initial portfolio value £ 100,000
Annual withdrawal
No. years savings pot to last
10 15 20 25 30
2 % £ 11,133 £ 7,783 £ 6,116 £ 5,122 £ 4,465
Real return achieved 3 % 4 % £ 11,723 £ 12,329 £ 8,377 £ 8,994 £ 6,722 £ 7,358 £ 5,743 £ 6,401 £ 5,102 £ 5,783
5 % £ 12,950 £ 9,634 £ 8,024 £ 7,095 £ 6,505
If returns fall to 2 % and you need your pot to last 30 years, this figure falls to £ 4,465.( These numbers assume the said investment return is achieved each and every year. In reality returns will vary from year to year, often considerably).
Two Options
There are two ways to deal with this problem. Either you reduce your spending in retirement or you try to increase your investment returns. If you opt for the latter, you’ ll have to take some investment decisions that you may not be comfortable with.
ONSIDE WINTER 2016 | 29