If I was asked for one chart to sum up the current investment environment, the below would be it. This chart shows the German yield curve, which plots the yields on German government bonds with maturities ranging from 1 month to 30 years. The yellow line marks zero yield, highlighting the fact that German AAA bonds with a maturity of up to 9 years now offer a negative yield.
Rightly or wrongly, the policies of the European Central Bank – cutting interest rates to negative and buying bonds – are having massive implications on traditional savers and pensions. Cash deposit rates are effectively zero, or marginally negative for members of pension schemes, forcing people to save more for the same wealth objective. At the same time, the cost of purchasing an annuity to guarantee a pension income in retirement has soared.
This has pushed more investors to take additional risk in search of return, the extent of which they may not fully understand. The blind reach for yield only serves to exacerbate any equity market correction, as less informed investors are more prone to panic.
To deal with this challenging environment, people should reassess their own risk and return objectives, set realistic goals and ensure their existing investments remain suitable.