Shares, cash, real estate and record low interest rates.
We’ve not seen interest rates at this level since the 1950s, so what are the opportunities and pitfalls that come with a cash rate at one percent for everyday investors?
Low interest rates represent benefits in some investment categories, and hurdles in others. So how do you make low rates work for you? Understanding what avenues are available to invest in, in today’s environment is a topic I constantly discuss with clients and finance industry peers.
They say what goes up, must come down. Yet, no one knows definitively when the highs are at their relative highest, until after the fact. It’s the same with the lows, and no two cycles are the same: whether it’s stock markets, cash rates, or property cycles. The only information we have to rely on is market fundamentals to make good investment decisions. So, what are the fundamentals telling us today?
Can I say from the outset that due to the complexity of markets, firstly speaking with a trusted financial adviser is recommended. One of the things a financial adviser will get you to consider is your target return: this is the return you want from your investments over a defined period. That will help determine the types of assets and yields that should be in your portfolio. Another question your adviser will ask you about is your risk appetite. You see, the higher the annual returns you are chasing the higher the risk. And there is always risk: market volatility, not outpacing inflation; as well as a risk that you won’t achieve the desired yield in the timeframe. If you don’t currently use a financial adviser, but are interested to understand how they could assist you to better plan your finances, I’d be happy to put you in touch with someone in my network.
Three popular investment types and their performance in the past month
Time to switch to stocks?
Investing in shares, or managed funds or exchange traded funds is widely considered riskier than keeping all your money in bank deposits (we’ll discuss that next!), but our Wealth Market advisers often say the long-term risk of missing out on any potential growth may be greater. But is now the right time? The Australian stock market has been the victim of increased volatility as a result of the current US-China trade war, clocking its worst fall in 18 months in August, with more than $56 billion in value wiped off the market in 24 hours. All triggered in the US, the ASX was the worst-performing index in the Asia-Pacific that day, and has yet to return to its pre-August highs.
To balance the inherent inability to effectively time the market, a competent financial adviser may recommend pursuing a diversified portfolio (including super) that meets your investment time frame and risk tolerance, as well as developing a regular savings plan (that could include investing ongoing employer super contributions appropriately, or investing regular savings into a portfolio of well diversified investments). However, both these options require having a considered financial plan in place. If you don’t already have an established plan - this, coupled with recent volatility, may mean now may not be the best time to switch to stocks.
Is cash still king?
As the Reserve Bank of Australia ratchets down the official cash rate towards zero, term deposits and bank deposits are on the nose because their returns are eroded in this environment. For example, the online savings account interest rates have plunged from 7.3 per cent over a decade ago to around 0.6 per cent now, and will soon go lower by about another 0.2 percentage points. One-year term deposit rates were 8.25 per cent, but are now hovering around 1.8 per cent and many predict they are still heading south.
Additionally, in this market, you have to ensure that your investments return more than inflation. If you’re using bank deposits to save for a home loan, after inflation today at 1.3 per cent and tax on your interest earnings, your savings might actually be going backwards! This trend doesn’t look to be reversing any time soon, with a recent report by HSBC noting that “longer-term real rates — which take inflation, or rising prices — into account, will be close to zero” and “global interest rates are going to stay low going forward for a number of years".
Safe as houses?
It’s an age-old adage dating back to the Victorian era. And just as it was then, for many Australians, their biggest asset is still their home or investment property. Real estate forms the backbone of the wealth of many Australians, and after a rocky few months for values and activity, things are now looking up.
For the first time in years, the fundamentals of property investment are aligning. Interest rates are falling, property prices largely appear to be stabilising (in July, home values recorded zero growth nationally which denotes stablisation. Prices rose slightly for the second month in a row in most capital cities) and constraints on bank mortgage lending have been relaxed. We’re in the lowest cash rate environment since the 1950s. The low ‘cost’ of money makes for a lower cost of debt meaning buying a new home, renovating or refinancing could be worth considering. Low interest rates can make it more affordable to buy an investment property and become a landlord.
The banking regulator is also doing its bit to breathe new life into the property market, scrapping a rule that required banks to assess new mortgage customers on their ability to manage repayments with 7.25 per cent interest rates no matter what their actual rate might be. Put simply, the removal of this rule will allow more customers to qualify for loans. If you want to know how this might affect your ability to buy in this environment, get in touch.
Interest rates create and remove opportunity in various investment categories, so it’s worth discussing your portfolio and plans in this new environment. If property is part of your plan, give me a call and we’ll see how we can make low rates, new repayment criteria, and more housing market movement work for you.