During the week I received scores of emails from cash investors who are either retired or are on the verge of it, and are alarmed at the direction of official interest rates, which hit 3 per cent last week.
These people are alarmed because with inflation at 2 per cent (and core inflation at 2.8 per cent) and the average cash yield from banks at 3.5 per cent (soon to be lower), their investments aren’t earning much more than the cost of living.
A lot of these people have retreated from shares due to their volatility, but now find themselves relying on either money in transaction accounts or term deposits. In the latest Australian Taxation Office breakdown of the investments in Self Managed Superannuation Funds, the largest asset class is ‘cash and term deposits’, at 30.7 per cent. The retreat from shares, into government-guaranteed cash, has made people feel safe in the short term, but now also vulnerable. So what to do?
Here are some thoughts:
1: Transaction accounts, cash management accounts, term deposits and accelerated savings accounts are all capital guaranteed by the government up to $250,000 per person. They are all zero risk.
2: You can find a better yield than a transaction account’s zero per cent, without taking on more risk. I’m sure that the institution you save with has another product that rewards savers by paying them up to 4 per cent, and they also have term deposits that pay more than that.
3: You can diversify your investments within capital-guaranteed investments; you don’t need all your cash in one account. Why not have a lump of funds constantly being rolled over in 90-day term deposits, and some others in 1-year TDs? Then have a large amount of your savings in a high-yield online savings account, and have the interest paid into your transaction account?
4: Don’t forget bonds. Typically they come in the form of government bonds, corporate bonds, bank bonds and bank covered bonds. Many bonds are low-risk debt products that yield good returns and retail investors can invest in them, usually in a retail fund environment. Some of these funds have been returning as high as 7 – 8 per cent p.a. to their investors.
5: Get advice. From what I am seeing, cash investors are staying away from advisers or they’re unhappy with the amount of interest shown in cash investors by advisers. I suggest that instead of dropping out of financial advice altogether, that you search for a planner with an interest in cash investment strategies and then adopt a more active approach. Don’t make cash a ‘set-and-forget’ option. If you look at all of the cash and bond options, your available yields move from zero to around 8 per cent p.a.
As interest rates move down, your job is to find more yield with little risk. I’ll be interested to see how you go. Send me an email at mark@ybr.com.au * Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. Email Mark on mark.neos@ybr.com.au with any queries you may have or check www.ybr.com.au for your nearest branch.