The hunt for yield - investing in a low return environment
Written and accurate as at: Jul 10, 2016 Current Stats & Facts
Now may be a great time to review your portfolio with your financial adviser to ensure you are on track to achieving your objectives and to assist you with any changes that you are considering making. As always do your homework and invest time up front before you make a decision.
With the current cash rate in Australia at an all-time low, cash and term deposits investments are generating minimal returns after taking into accounts the effects of tax and inflation. This means that many investors are on the “hunt for yield” (or income), but with slower economic growth and low interest rates this can be difficult to find and can often lead to investors taking greater risk as they chase higher returns.
There are a range of investment options for investors to consider that may generate higher returns. These include bonds, hybrid securities, property, infrastructure and high-dividend share investments. While these options offer the potential to generate higher returns than cash or term deposits, they each carry different risks and may require different investment time frames. They may also alter the level of risk in your portfolio.
Here are our top tips for those investors considering moving money out of cash and fixed interest into other income-producing assets:
- Remember that income (or yield) is only one element of an investment’s total return. The underlying risks of each investment and the fit within your portfolio should always be taken into consideration.
- It’s important to diversify your investments. Don’t put all your money in a single investment or asset class.
- Make sure you understand where and what you are investing in. An investment offering a higher return will typically mean a higher level of risk. A good saying to remember is “if it sounds too good to be true” then it probably is. Make sure you read the Product Disclosure Statement or offer document and seek financial advice before making a decision so that you are aware of the potential impact on you.
- With some home loan rates now under 4% it may be a great time to consider paying more off your debt. When interest rates are low you can repay your debt sooner. Paying off debt is likely to be one of the better investments you can make as for personal home loans the interest you are paying is out of your after-tax income. It also frees up your cash-flow to enable you to spend or invest elsewhere.
- If you’re considering property purchase as a long-term investment option do your research to ensure you’re buying a quality asset and that you factor in interest rate rises into the cash flow and affordability. A good test can often be to make sure you could still afford the borrowings on the property if interest rates were to rise by 3% pa.
- Be aware of tax-based investment strategies. These types of investments are typically offered as mortgage management schemes or agribusiness investments like tree plantations and olives. While some of these investment can provide tax benefits that may legitimately assist you, the rate of failure of these types of investments has historically been high and can often mean loss of capital.
- Be conscious of the fees that you can incur when making a switch to buy or sell out of any investment.
- Remember to always seek professional advice. Changing just one investment in your portfolio can significantly alter the returns and the risk of the portfolio. It’s important that any decision to switch investments is done in consideration of your investment time frame, risk profile, tax consequences and other objectives.
Now may be a great time to review your portfolio with your financial adviser to ensure you are on track to achieving your objectives and to assist you with any changes that you are considering making. As always do your homework and invest time up front before you make a decision.