Interest rates are rumoured to drop again; what impact will that have on your portfolio?

Last week, the RBA Governor Glenn Stevens made comment about the risk to retirees if there was another interest rate drop.

It was then further discussed in the media that if retirees where to invest $1 million, then based on expected interest rate returns, this would be a return of only $1297 per fortnight. This is similar to those receiving the Centrelink Age Pension! (from a million dollars!)

This greatly concerns me. Not so much because of the retirees who may be potentially earning less on their cash (bank) account investments, but rather that reminder that so many retirees, or pre-retirees rely on cash investments solely to fund their retirement!

Interest rates have been on a decline since November 2011 and hit their first record low in April 2013 at 2.75%. Rates have now hit a further record low in February 2015 at just 2.25%.  This means these ‘cash only investors’ have been getting historically low returns on their investments for that same period!

Understandably the reason people chose this investment option is because it is low risk, stable and (practically) guaranteed. I get that. Also, retirees may not be comfortable with taking on more risk to try and get better returns on their money.

This is why when providing advice to my financial planning clients, I want to educate them, and always discuss the importance of DIVERSIFICATION.

Diversification is simply blending a mix of different investments into a portfolio. This blend is foremost a mix of different investments types, like shares, property, fixed interest, cash and alternatives. These are referred to as ‘asset classes’. Diversification can then be layered further by investing into different investment options (providers/fund managers).

diversification

The benefit of diversification is that it can lower the overall risk in your portfolio. Different kinds of investments, on average, will provide higher returns over the longer term, rather than relying on any single investment type.

So the other benefit is that you are looking at better long term average returns than just that of a low cash interest rate!

A diversified portfolio means that some investments will be doing well, others not so much, and some in the middle.

Unfortunately, no-one has that crystal ball that will tell us which asset class will provide the best returns at any given time. And trying to guess is a gamble that I wouldn’t be willing to take.

Diversifying in a portfolio doesn’t have to mean taking on huge amounts of risk that you are not comfortable with.

Of course, diversification doesn’t eliminate all risk, but it certainly can cushion the blow!

If you would like any further information regarding this, please contact us.

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