From 1995 through to today, the cumulative rate of inflation in US dollar terms has been close to 100%. You would need at least $2 today to adjust for or beat inflation if you had started with $1 in 19951. It also means that your purchasing power has been halved within a generation.

One good way to mitigate inflation would be to invest in assets that provide a steady stream of income. Stocks, bonds and multi-asset can all provide great opportunities for income generation. These offer regular payouts that can keep pace with or even exceed inflation rates, helping to preserve your purchasing power over time, albeit the level of that income is not guaranteed.

It also pays to stay invested. If an investor had invested $10,000 in the S&P 500 Index around 20 years ago, he would have ended up with around $65,000. If he had missed only the best 10 days, his returns would have more than halved to around $30,000.

By staying invested in income-generating instruments, you fully benefit from a) not missing out the best trading days and b) not missing out in income through your investment period.

Source: J.P. Morgan, S&P 500 Index Total Returns from 1 January 2003 to 30 December 2022

For illustrative purposes only. Past performance is not a guide to the future.

Mitigating risks: spread exposure across asset classes

Diversifying your income investments across different sectors and asset classes can further reduce risk by spreading exposure and enhance your portfolio’s resilience and returns. A diverse cash flow can act as a buffer through the market’s ups and downs, as well as reduce vulnerability to sector-specific downturns. Because fixed income is attractively priced the asset class will likely deliver positive returns when equities sell off at the end of this cycle.

In 2024, a high-income approach might be the most interesting option on the equity front, with the US Federal Reserve expected to cut rates. For fixed income, credit markets rallied hard on the back of the anticipation of monetary easing. With Treasury bills still yielding 5%+, a portfolio of safe, investment-grade rated issuers earn a yield that is now well above inflation. Selectively adding high-yield and emerging market debt issuers to the mix makes for an attractive proposition in the current environment. Our global fixed income footprint allows us to constantly screen for best ideas in any market. In terms of multi asset allocations, the key would be dynamic asset allocation, diversification, and the outcome of stable income.

Enhancing yield: boost returns with suitable strategies

Currently, our income-oriented equity, fixed income and multi asset investment strategies are finding yield opportunities ranging from 5% to 10%, and there are ways of boosting total returns across each asset class through the use of strategies that suit the asset class.

For equities, investors get paid to wait. We believe that strong secular trends like AI and the broader technology revolution would drive equity appreciation in the long run as companies compound their earnings. In addition, dividend capture enhances the yield. It is innovative but simple. We identify dividend events for companies with strong fundamentals and trade around those events to boost the yield.

Elsewhere in fixed income, credit spreads and changes to the risk-free rate drive the total return of a bond portfolio. In 2024, total returns will likely be boosted by monetary easing rather than credit spread tightening. Yield curves remain inverted which makes shorter maturity bonds a compelling investment, particularly for investors who are risk aware and do not allocate to high yield bonds in the current economic climate.

Diversification, meanwhile, would be key for multi-asset portfolios. An optimal strategy would involve investing across a wide array of income generating assets across traditional and listed alternative asset classes. Many of these assets offer stable and uncorrelated income that is less affected by market conditions. When blended carefully, these assets can help build resilient portfolios that can deliver more stable and consistent income with scope for capital growth.

The last word

In summary, income is an attractive option for investing in 2024 and beyond. abrdn is a specialist income provider, and we are different from our competitors when it comes to income generation. Investors have a wide menu of income funds available to them and can pick and choose based on their individual risk profiles and preferences.

Investment involves risk. The value of an investment and any income from it is not guaranteed and can go down as well as up.

  1. Source: CPI Inflation Calculator April 2024