While borrowers rejoice at home loan rates as low as 2.8 per cent per annum, long-suffering term deposit investors are on the ropes. According to FIIG Securities, the average term deposit rate among the major banks in 2008 was as high as 7.9 per cent, whereas today you are hard pressed locking in a rate above 2 per cent – that’s one almighty pay cut for retirees in need of regular income!
In his excellent book, Motivated Money, Peter Thornhill neatly captures this dilemma by pointing out that the challenge with term deposits over time is that ‘your capital may be secure, but your income is not’.
In July, the Reserve Bank of Australia (RBA) cut the official cash rate to a record low of just 1 per cent, and plenty of economists are tipping further cuts in the months ahead. Westpac Chief Economist Bill Evans believes weak inflation, a lack of wages growth, and higher-than-expected unemployment, will cause the RBA to cut again in October and February, taking the cash rate to just 0.50 per cent. After taking inflation into account, term deposit investors will be going backwards.
So are there alternative investment options for cautious investors seeking a better return on their money? The short answer is ‘yes’, but before delving into the options conservative investors might consider, it pays to begin with the end in mind.
The first question to ask is ‘what are you trying to achieve with your funds?’
The next question to consider is ‘what level of risk are you comfortable to take to pursue higher returns?’
Bear in mind that by pursuing higher returns, you naturally take on more risk. There are no free lunches. But it needn’t be an ‘all or nothing’ approach where you either hold all your funds in term deposits or all in shares. The key is to diversify across a range of defensive investments, so you add a moderate amount of risk at a level you are comfortable with in order to incrementally lift returns.
While interest rates are at record lows, there are still advantages in holding term deposits including certainty of investment outcome, peace of mind that the value of your investment will not fluctuate, and options to allocate proceeds at maturity.
If, however, your aim is to boost annual returns by 1–2 per cent over the long-term (while keeping risks reasonably low), a suitable combination of the below options may help you reach your goal.
There are currently multiple online savings accounts in the market with introductory rates as high as 2.75 per cent for four months. This offers a handy premium above term deposits rates, but you need to be vigilant at the end of the honeymoon period to either request a continuation of the higher rate or be willing to re-allocate funds elsewhere. It is critical to read the fine print to ensure you understand the prerequisites to receive the advertised interest rate.
You can access managed portfolios containing government, semi-government and corporate bonds from a range of providers offering regular income and stable returns. Managed investments and exchange-traded funds are available via the ASX and typically offer quarterly investment income. The benchmark return for diversified fixed income allocations over five years to 31 July 2019 was 5.20 per cent per annum.
In simple terms, a corporate bond allows a company to raise money to fund its ongoing business activities. Where you invest in a corporate bond, you lend the company money in return for regular interest payments and your money back at the end of the term. You can access corporate bonds directly or via a range of managed investments and exchange-traded funds. The benchmark return for corporate bonds over five years to 31 July 2019 was 4.68 per cent per annum.
Some retirees choose to supplement their income with an annuity, which pays a guaranteed income on a monthly or quarterly basis, either for a lifetime or for a set period. Annuities offer certainty as your ongoing income is not subject to fluctuations in interest rates or share markets.
While a typical growth option within a super fund may hold around 75 per cent of its assets in shares, it is also possible to access conservative, diversified managed investments that may hold 25 per cent of its assets in shares (typically Australian shares, global shares, property securities and infrastructure) and the remaining 75 per cent in defensive assets (typically corporate bonds, government bonds and cash). Over the long-term, such vehicles offer the prospect of higher returns than cash, with a limited amount of volatility given the defensive mix of assets. Such funds are available as wholesale managed investments or exchange-traded funds via the ASX. The benchmark return for conservative diversified allocations over five years to 31 July 2019 was 6.47 per cent per annum.
While past performance is not a reliable indicator of future performance, the right combination of the above investments may help you boost the average return on your funds over the long-term, while keeping risk levels relatively low. If you need assistance selecting a suitable mix of assets for your circumstances, it would be worthwhile seeking professional advice.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.