Cash shouldn’t be king in your investment portfolio – and here’s why.
Not many would have predicted one year ago that the Australian cash rates and bond yields would now be trading at 1% or less.
We are experiencing record low cash rates of just 0.75% after the Reserve Bank of Australia’s latest 25 basis point cut in October. Less than six months ago the cash rate was more than double this.
Commonwealth bonds are trading at yields to maturity of less than 1% for up to 10 years. This in itself suggests cash rates are likely to fall further.
It appears the market is expecting cash rates in Australia to be cut two more times, with some commentators such as Deutsche Bank suggesting rates might fall a further two times.
What does this mean for your investment?
- Low rates are concerning for retirees and those relying on cash deposits for income.
- A retiree with a $500,000 deposit on a 12-month term which pays 1.5% per annum will only return the investor $7500 in interest – hardly enough to enjoy a comfortable retirement.
- Making ends meet during retirement has arguably never been more difficult.
How low can rates go?
- If Germany and Japan are used as a guide, rates below zero cannot be ruled out.
- Overnight cash rates are currently negative in both Germany and Japan.
- The entire German yield curve is currently negative.
- Recently, Germany issued more than 800 million Euros in 30-year bonds at a yield to maturity of -0.11%.
What are your options?
- More retirees than ever are looking to the share market for income.
- Australia’s All Ordinaries have averaged approximately 6% gross yield for the past 30 years when including franking credits.
- Many of Australia’s large income stocks have been doing it tough, including the big four banks and major telecommunication companies.
- For a retiree without a diversified portfolio, this could be devastating.
- To get the most out of the share market, retirees should build a diversified portfolio of income stocks and manage it using a tax effective strategy.
To discuss your investment options and how you can diversify your portfolio, book an appointment with one of our experienced advisors.
Contact us by email firstname.lastname@example.org or phone (08) 8172 9111.