MONEY CLINIC | How can I maximise investment returns without dipping into my capital?

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A Fin24 reader living off the interest of his investments seeks the advice of an expert on how to make the most of his returns. 

He writes:

I have a lump sum invested in a money market, of which I live off the interest as I am unemployed. Due to the slowing economy, interest rates have dropped considerably which has affected returns. How can I maximise my returns without using capital? Would buying a small apartment to rent out be an option? Fixed investment is not an option as I live off the interest.  

Michael Rossouw, Senior Investment Consultant at 10X Investments, responds: 

Many investors find themselves in a similar situation. The stock market has averaged single digit returns for a few years now, followed by a major stock market crash. This has made many investors wary of investing in equities and seeking the relative “comfort” of cash until things become less uncertain. The problem with this is that sitting out the tough times means you tend to be locked out of the recovery too. Whatever your circumstances, it is always worth looking at your savings/investments and trying to find a way to diversify even just a little.

Interest rates are lower than they have been in half a century. Fixed deposits offer better interest rates but would require you to fix your capital. (A word of caution: be careful when comparing these interest rates to market-related investments as the returns are quoted as compound returns whereas fixed deposits are quoted as simple interest.)As for buying a property, the buy-to-let market is not in the best shape.

The South African property market had been struggling for some time before Covid-19’s arrival. The pandemic hit the employment market hard, with many people losing their jobs and others suffering a reduction in earnings, which filtered through quickly to the property market. People who had been affected by Covid-19 and the lockdown gave in their notice, cancelled rental agreements or asked to renegotiate terms, thus putting downward pressure on the rental market and depressing yields on property investments.

If you were in a position to buy something now and hold for the long run, the potential for capital growth would be good. But since you rely on this capital for income in the short term, this might not be ideal.

There are other options. Short-term interest rates (money market) are low, but long-term bond rates are higher. An investor can access these higher rates by investing in a fixed income fund. Fixed income funds are classified as slightly riskier than money market, but much less risky than the stock/property market. 

There are funds that take a more diversified approach, where instead of investing in a single asset, you diversify across cash, bonds, property and equity. The fund caters for many cautious investors who would like to diversify across all four investment types, but allocate most of the investment towards defensive assets (cash and bonds) to reduce risk, with a small allocation towards property and stocks to increase the growth potential.  

Questions may be edited for brevity and clarity.

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