Following recent sharemarket volatility and last week’s announcement by the Reserve Bank of Australia that the cash rate will remain unchanged at 1.5 per cent, Kinetic Super’s Chief Investment Officer, Paul Kessell offers some timely advice about investing in a low interest rate environment.
At Kinetic Super, we encourage all Australians to take control of their financial future. But it can be difficult to know the right path to take when investing. Should you focus on the short-term or have a long-term investment strategy? How should you respond to sharemarket volatility?
When interest rates are low, the natural inclination may be to borrow and spend rather than save. Volatile sharemarkets add to the complexity.
Staying on track with your super during these times is particularly important. And there are some basic steps you can take to ensure you’re making the most of your investment portfolio.
Understanding these key facts about interest rate cycles and the sharemarket can help you make informed and relevant decisions for your individual circumstances and specific needs.
1. Low rates are not going to last forever
Highs and lows are a normal part of the economic cycle. The Australian sharemarket has had six years of very strong returns so a slowdown was inevitable. Super is a long-term investment so it will go through several economic cycles over the life of your investment. And interest rates will rise again, although the timing is uncertain.
2. It’s also a low inflation environment
This means you don’t need to earn as much to grow your super each year. The inflation rate for the last year has been sitting at about 1% so if you’re hoping to achieve a return above inflation, then you only need to earn more than this for your savings to be growing. In this context, a return of, say 4%-6% per annum would be regarded as a solid performance for the year.
3. Some assets provide better returns when rates are low
Bonds and property are two of the asset classes directly impacted by low interest rates. The Australian sharemarket produces an average dividend significantly higher than what you could earn on a bank deposit at the moment – more than double the current cash deposit rates. So if you’re searching for higher returns, that’s one place to investigate further. But dividends are only one consideration when investing in the sharemarket. Share prices can also fall rapidly and significantly lower your overall returns. So it’s important to think about total returns, not just dividends.
4. Investing in the sharemarket is a marathon, not a sprint
Sharemarkets have been jittery lately and this raises concerns about whether it’s a good investment option. These recent ups and downs should just be a reminder that shares are generally better suited to a long-term investment strategy (5-10 years) so you can ride through the highs and lows. But really it all comes back to risk and how much you could lose before you start to lose sleep over it?
5. Adding a little to your savings can make a big difference in the long run
Rather than searching only for higher returns and second-guessing the sharemarket, think about contributing a little more to your savings each pay packet. The compound interest that you earn can add up to thousands of dollars over the long-term.
Most importantly, investors need to remember to not act rashly. Changing investment strategies to chase returns is a high-risk decision and it could go wrong. Stay true to your risk profile and keep the ship steady as you head towards your long term goals.
