Short term fears vs long term outcomes

If this year’s Budget is all about kick starting the economy through incentives for small business, we should see an economic stimulus in the economy over the next two years.  Whereas the Government is using words like ‘have a go,’ and ‘spend, spend, spend,’ we believe it is time to save, save, save.   Why?

Planning for our retirement becomes a priority once we turn 50.  With retirement potentially extending 20 years as we’re living longer, it’s important we make plans now for income streams that will allow us to afford a retirement of choice.

Planning for retirement requires a strategy. With the current economic climate indicating continued low interest rates and a low dollar, it makes financial sense to play it smart when investing in your future.

Why save?  But first a little bit of background …

Pre-GFC, many people borrowed, and often beyond their means.  They borrowed to invest, upgrade their home or simply buy consumable goods.  When the GFC hit, we saw investment assets across the board (property, shares and superannuation budgets) fall substantially.  This triggered, amongst other things, a move in investments from shares to cash, especially for retirees who saw their asset values fall and the income from these reduce to below their standard of living costs.  As it turned out, this level of borrowing was a high-risk strategy, albeit an understandable one.  Many investors’ portfolios were inadequately structured to combat such a downturn in the market, moving investments from stocks to cash simply compounded the problem: Short-term goals at the greater expense long term.

As they say, hindsight is 20/20 vision. Had you remained in shares you would be substantially better off today.

Since the market bottomed-out in 2012, the Australian stock market has rallied strongly whilst the Reserve Bank has lowered interest rates to a 50-year low and this has impacted negatively on the returns paid to cash deposit-holders.

Therefore, cash investors who are now returning to stocks and shares to benefit from the market growth have unfortunately ‘missed the boat’ and the 30%+ return that the market has gained since the lowest point of the GFC.

The recent Budget revealed the long-term impact the collapse in commodity prices has had for the Australian Government revenues and overall terms of trade.  Add to this China’s industrial slow-down and higher unemployment on the home front, we can expect the continuation of low interest rates and a low Australian dollar for the next two to three years.  This outlook throws out some potential risks such as:

  • Inflation:  Will your Interest Bearing Securities especially ultra-low yielding securities such as cash earn enough to keep up with inflation?Cash yields in Australia are mostly all under 2.5% per the consumer price index was running the neighbourhood of 2.3% in the third quarter of 2014.  That means investors holding too much cash are not preserving much of their purchasing power.  The longer this investment is held, the higher the inflation risk increases.
  • Shortfall risk:  If you are saving for a long-term goal, such as your retirement, holding too much in investments with little to no short-term volatility but commensurately low returns can help exacerbate shortfall risk.

In face of this likelihood, the question is where is the best place to invest and what actions should pre-retirees take?

A sound investment portfolio should have some exposure to growth investments as well as defensive investments.  This approach provides the diversification required to enjoy long-term growth to keep pace with inflation, whilst retaining sufficient defensive investments that provide a level of security.

The amount of income an asset produces is particularly important in the lower-growth world in which we now operate, where share markets are more likely to grind upwards than experience back-to-back years of 20% price gain, as was the case leading up to the GFC.  In this environment investing in assets with strong and sustainable income (and income growth) is crucial to building wealth over the long run and beating inflation.

By the way, when they announced the Budget last week, guess what benefited the most … the share market; more specifically the retail sector share price.  The jump in value on the major retail shares rose between 3 and 5% and was described by some as “the budget bounce everyone recalled.”

And what happened to interest rates?  They started going down again.

Has your investment portfolio been subject to the ebbs and flows of short-term fears vs your long-term outcomes?  Why not call us on 07 3251 3201 to make a time to discuss the latest financial options available that could help you reach your financial goals faster.

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