Investors no better off than they were in 2016 due to rising interest rates

Investing

Investors are no better off than they were in 2016 despite stocks rising, analysis has found.

The FTSE 100 broke the 8,300-point barrier for the first time on Tuesday amid hopes of interest rate cuts from central banks, while the S&P 500 recorded its best three-day rally so far in 2024.

But although their portfolios may have leapt up in nominal terms, investors’ real-terms wealth has suffered a serious blow due to rising interest rates.

Since 2021, investors’ portfolios have fallen by 15pc in real terms, according to analysis by Asset Risk Consultants (ARC).

The drop, caused by central banks aggressively upping rates to combat inflation, means most investors’ portfolios are back at 2016 levels.

For portfolios to truly recover, investors need to achieve a decade of “real” returns averaging 7.3pc, the firm said.

The research involved analysis of investment managers’ most common portfolios – those with a risk profile of 60pc to 80pc in equities.

Up until 2021, these were delivering real returns of around 4pc per annum.

But surging borrowing costs caused both stocks and bonds to fall in tandem in 2022, significantly denting investment performance.

ARC said investors would now need real returns of 7.3pc for portfolio performance to revert to the historical norm of 4pc.

A recovery like this would require a sustained strong performance by both bond and equity markets, the firm went on.

ARC warned that investors who rely on regular withdrawals should consider “tightening their belts”, as the level at which they could withdraw sustainably is today 20pc lower than it was a decade ago.

Graham Harrison, of ARC Group, said: “The typical sterling private client investor needs to accept that their real wealth has fallen by about 15pc. Thinking that recovery in nominal terms means their portfolio is back on track is accepting an illusion.”

Over the past decade, the optimal portfolio has consisted solely of equities, Mr Harrison said – “as equities were driven ever higher by excess liquidity and bond yields moved to ultra-low or even negative levels”.

But now investors should be thinking more carefully about their asset allocation, he added. “The return of positive real interest rates in bond markets means that multi-asset class investing should once again offer both risk diversification and positive real returns.”