On Tuesday, July 2nd, the Reserve Bank of Australia reduced Australia’s interest rate settings, again taking the historically low interest rates we have seen for numerous years, to the lowest-ever level. With an election-year applying the brakes to business investment, very low wages growth, and low inflation levels, the RBA is hoping a rates reduction will get the economy moving again and encourage investment and spending.
This is great news for many people, including residential home buyers and property investors. However, for others, a low interest rate environment can be concerning.
There are vast numbers of people who live off interest income of various kinds who may be concerned as the RBA looks to pump-prime the economy with interest rate cuts. Having come down significantly since the global financial crisis of 2008, those relying on interest income have found it increasingly difficult to earn a living.
Take steps to avoid the low interest rates downside
It doesn’t have to be a disaster though. Hamish Ferguson, a Financial Adviser with Vision Wealth Solutions in Newcastle, says there are steps that can be taken to improve your situation if your interest income has taken a hit in the long unwinding that has been occurring with interest rates in the decade following the Global Financial Crisis.
“Lower interest rates have been a long-term trend and the RBA’s recent rate reduction takes them to the lowest-ever interest rate settings Australia has ever seen. The RBA clearly thinks the economy needs to be stimulated, and the recent reduction is designed to encourage consumer spending and investment.”
Balancing your investment strategies approach to risk
While Hamish says low interest rates won’t be with us forever, until there is improvement in the economy the RBA may look to maintain lower interest rates. For interest-income investors there is a real need to look at how investment returns can be improved while not losing the essential characteristics of interest-income investments, in particular lower investment risk.
“For a while now, people have been encouraged to take on greater risks in investing; especially in superannuation and managed funds. There are pros and cons to greater risk; but as someone is nearing retirement there is a need to maintain investment income while reducing risk. People heading into retirement will be drawing down on their savings and want to minimise the chance of losing a large sum of their life savings to risky investments.”
In these low interest rate periods, Hamish says the key to getting a decent return while not taking on a huge amount of risk is in working out a balance.
“The question is one of balancing risk. Interest-generating investments are often popular because they can usually be turned into cash fairly quickly if needed. But the problem is, as we are living longer, we’re faced with the possibility of running out of savings due to ever-reducing returns associated with lower interest-income. Taking on slightly more risk and continuing to build savings, even while we’re drawing down on them to live, can help to overcome the problems of lower interest-income investments.”
Change your strategy and change your outcome
Hamish says by changing your investment approach slightly you can vastly improve your outcomes in this new low interest rate reality.
“There are ways to give you some of the qualities of interest-income investments, while improving your return enough to help you live better.”
“Blue Chip shares with household names like Woolworths or Coles, for example, can usually be readily turned into cash as they are popular and always have a market. They may also deliver you better returns than a strictly interest-income investment.”
“It is possible also to find Capital Guaranteed and Capital Protected investments. These can work to protect the value of the money invested while also having better returns associated with riskier investment options.”
ASIC’s moneysmart.gov.au website explains that Capital Guaranteed and Capital Protected investment products are often made up of ‘safe’ as well as ‘risky’ components. They recommend getting good advice to work out if they are right for you.
Speak to your financial adviser – what are your options?
Hamish recommends speaking to your Financial Adviser. Regular yearly financial health checks can help by adjusting your investment strategy to the environment you face and also your needs now and in the future.
“Many of the changes you might need to make are complicated and good advice can save you a lot of money. It is a matter of sitting down with your financial adviser and working out if the changes to interest rates now and in the near term are likely to have an impact.”
“For some people, it mightn’t be necessary to make any changes as other investments in their portfolios could mitigate the low interest rate downsides. But others may need to adjust their strategy, and it is best to explore your many options before deciding on changing anything.”
If you have concerns about your portfolio or would like to arrange a financial check-up to see whether you’re on-track to meet your financial goals, contact Vision Wealth Solutions.
Hamish Ferguson founded Vision Newcastle in 2001
Disclaimer:This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs