It seems like the sun never sets on a day without some mention of what the Governor of the Reserve Bank of Australia will do to interest rates at his next Board meeting. The reasoning behind dropping rates is to give mortgage holders and businesses more disposable income to spend, thereby stimulating the economy. Lower rates also encourage people to borrow to invest into property or businesses, potentially creating more jobs and a stronger economy.
But what about the many thousands of Australians who have watched their investment-based incomes dry up over recent years? With term deposits paying the same rates of return as online at call accounts – sometimes less – many retirees are looking for alternatives that will reward them with higher returns on their invested funds.
Here are a few options that might be worth considering – but it’s important to be conscious of the risk levels associated with some of these investments:
- Allocate a higher proportion of your investment to shares. Although shares have higher volatility, they also can be expected to produce higher returns than defensive assets such as bonds. The difference in return between these types of assets is often called the ‘risk premium’. This is the extra return for taking on extra risk.
- Use active asset managers. As the term implies, more active fund managers will have a higher potential for increased returns through constantly searching for new or better opportunities.
- Allocate a higher proportion to listed Australian Real Estate Investment Trusts (A-REITs). Although these are generally low growth they have lower volatility and a higher and more reliable income stream from property rents. Their growth is vulnerable to interest rate rises, but they do well in a low rate economy.
- Look at alternatives such as hedge funds, hybrid securities or unlisted trusts. These are more complicated assets so ask your financial planner to explain how they work.
We stress that it may not be appropriate for you to follow some of these strategies and personal advice is essential.
If you need to bolster your income against yet another interest rate drop, a better idea is to start with a review of your investment strategy and portfolio. Don’t risk what you already have by indiscriminately switching into high income investments.
Seek professional guidance from your financial planner on (07) 3040 4840 to ensure your portfolio remains diversified and able to survive until rates start to head up. They will, eventually.
The advice on this site may not be suitable to you because it contains general information that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Please also refer to our general advice warning under contact us tab on our website. The article is based on information available at the time of writing only and therefore care should be taken as to the accuracy of the content.
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