With the prospect of a Donald Trump win in the US elections, and a passive Reserve Bank of Australia (RBA) continuing to hold interest rates at an all time low, the pressure on yield seeking investors such as self-funded retirees is increasing, says David Bryant, head of Australian Unity Investments.
“We are set to be in a low interest rate environment for some time so investors need to accept this fact and make investment decisions accordingly.
“On top of this, markets are continuing to slide as investors sit on the sidelines, waiting until the US election result is known.
“There is unlikely to be any respite until after the US election, and even then the RBA is likely to continue its passive approach for now, with no rate cuts or increases until the picture becomes much clearer.
“One of the biggest risks now facing investors is opportunity risk which happens when one investment opportunity is chosen, and then finding that another better opportunity exists or may arise.
“The opportunity risk for retirees with cash tied up in term deposits, as well as lazy long term investors who keep their savings in interest bearing bank accounts because they have never got round to looking at other investments, is increasing all the time.”
Mr Bryant said that investors and savers can reduce opportunity risk very easily, without taking on high levels of other risk, by seeking other investments and adding diversification to their portfolio.
“For lazy savers this means looking for growth assets that will also add to their capital over time.
“For retirees, diversification and increased returns is achieved by adding a number of different yield-producing assets, thus managing risk through diversification and ensuring investors don’t have all their eggs in one basket.
“A major mistake yield-seeking investors can make is moving all their money out of cash and putting it all in whatever investment currently offers the best return.”
He said that the sensible strategy when seeking yield is to balance low returns from fixed interest investments with a mix of higher yield investments, which also manages risk through diversification.
“It means keeping an appropriate position in secure, but currently low interest-producing, fixed interest investments, while spreading investments across a number of other asset classes, including domestic and international shares and property.
“Even within property there should be diversification away from residential, for example into commercial, healthcare or industrial property funds.
“There are also other investment classes that can offer diversity, good returns and access to funds such as the new mortgage funds that have been developed.
“Right now, the best approach for investors is not to keep more money in cash than is sensible for their circumstances.
“For example, for an SMSF in pension mode it makes sense to have a minimum of one year’s pension payments easily accessible, but probably too much more is increasing opportunity risk unnecessarily.
“Cash is simply not a risk free investment in the present climate,” Mr Bryant said.
