Chasing yield is getting harder
06 May 2015
The decision by the RBA to drop the cash rate to 2% has posed problems for those super investors who have a lot of their capital in cash. Chasing yield has been the biggest challenge for investors in the international environment since the global financial crisis. Australia has to some extent been protected from that, but as the China boom eases and the economy worsens, that problem has now arrived on our shores.
There is no easy answer for those needing income, as the AFR points out:
"Low rates are bad news for those needing income. "The comparison is getting 2.8 per cent in a CBA term deposit rather than 4.5 per cent in yield if you buy the shares," points out BT's Mr Simon. "The chase for yield is driving up equity prices and creating a false market."
Adviser Suzanne haddan, founder of BGF Financial Services, says this is a classic reminder of the importance of being diversified. With most of her clients already in retirement, she adds: "We have always encouraged them to spread their money across a range of asset types – cash, term deposits but also property and some share-related investments. Those investments are generally doing quite well and are covering you for low interest rates."
She recommends staggering maturity dates when it comes to cash and term deposits. "What you need to do is have some in short-term six-month accounts, some in medium 12-month accounts and some in long-term 24-month accounts. If you've been following that, even if rates are low today it doesn't affect your money as it's not at call or all maturing in three months."
For retiree investors with all their assets in cash, she suggests gradually buying into other share or share-related investments that suit your risk profile and give you a higher return."
For super investors who do not need income the lesson is pretty clear: diversify portfolios into equities, fixed interest (bonds), cash and perhaps property. About 92% of the variance in portfolio returns is determined by the allocations between these assets. For super investors who do need income, the problem is to match their asset allocations with a lower tolerance of risk. Those relying on income cannot withstand big changes in share prices, so they need to be careful about their exposure.
The high dividend paying oligopolies -- mainly the banks and Telstra -- have offered a partial way out of this yield conundrum. BT's Simon continues to make that case. But with bank earnings coming under pressure, that option may not be as attractive in the future.