The world has changed from 10 years ago. Is your portfolio still positioned appropriately?
After the Reserve Bank`s recent back-to back interest rate cuts, the cash rate now sits at a very low 0.75% p.a. Indeed, when it comes to rates, we are in uncharted territory, with the current market view being that rates are unlikely to return to normalised levels any time soon. There is also the potential for a further interest rate cut in February 2020.
Low interest rates present a significant challenge for investors – and not just for those seeking income. Given this, we believe that now is an opportune time to re-evaluate investment portfolios.
Whilst the environment is challenging, the positive news is that there are still investment options available that can provide both income and growth, as well as investments that have the potential to outperform traditional benchmarks.
It may be time to make your cash and portfolio work harder than it currently is. A traditional habit of retirees is to hold their retirement assets, or part thereof, in cash or term deposits. In days gone past, you could obtain a term deposit for 12 months at 7% or 8%.
These interest rates have been dwindling since the mid 2000’s. Previously, interest income gave an annual boost to investors to pay their expenses, or used for Christmas or a holiday with the principal amount being reinvested for another year. Unfortunately, there was no capital growth to go with this income.
Given inflation is currently running close to 2.00% p.a., those earning interest on their cash at the official Reserve Bank rate are not keeping pace with inflation and investors face the potential for significantly negative real returns. It’s more important than ever to seek out cash and alternative options that provide both a positive real return and liquidity.
With the outperformance of particular sectors compared to others, such as the international markets in many portfolios, it may be time to review your overall exposure to risk. It’s time to take capital growth and profit and realign it to your risk tolerance and long term goals to obtain the growth targets you have.
How do we get growth in a period of stagnation and low rates?
Active involvement and management of your portfolios
- A well-chosen and considered portfolio of investments
- Regular reviews of your portfolio and financial goals with your planner; and
- A realistic understanding that the financial world has changed significantly
Unfortunately, a “set and forget” investment approach no longer works. Regular reviews with your planner, discussion about rebalancing your portfolio to include assets with the opportunity for capital growth, as well as income, is vital to the longevity of your funds.
This approach is not just for retirees – it is also vital for those of us still working to be actively involved in their investments and overall financial situation to get the most out of low rates to clear debt, but also ensure their retirement plan is on track. A significant number of workers do not have a retirement plan – they do not know how much they will need to have in retirement. They are busy with the everyday and are not preparing for their future.
This needs to change so that we all reach our goals in retirement and have sufficient funds to last our lifetimes.
When is the last time you had your investments and overall financial situation reviewed?