I know that this interest rate reductions send shivers down the spine of those on fixed income, however this does not have to be the case.
The universe of investment options is wide and becoming wider by the minute. The Future of Financial Advice legislation is having a positive effect on the costs associated with investing and fees and charges have never been more transparent.
Cash is not the only asset class and current cash returns are at all-time lows. Each and every year, inflation erodes the buying power of cash. The only way to prevent this from happening is to retain the interest instead of spending it and this is often not an option for many retirees.
When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.
Please don’t fall into the trap of thinking that the banks provide term deposits without fees either. Have you looked at the performance of our large banks recently? They are doing OK. The funds raised by the banks from your deposits are leant back out to the market at a higher rate than you are paid in interest and they literally bank the difference. Have you also considered that term deposits pay the interest at the end of the chosen deposit period whilst the borrower pays the interest to the bank every month?
My point is that there are a plethora of alternatives to just cash and with the right level of advice, risks can be managed to your chosen level and you do not have to be a slave to the cash rate.
That said, action is required on your part. I would not do this without advice from an expert and I would be careful to ensure that your needs are the highest priority.
Investment strategy and asset allocation can go an enormous way to improving returns and mitigating the risks associated with other asset classes than cash.
The great thing about Australia is our freedom of choice. It is, however, only great if you put choice to work for you. Don’t just sit in cash and complain; go forth and look for alternatives that suit you and your needs.
Strategy is everything.
Share your thoughts below: do you have a term deposit? How are your banking your cash? Do lower interest rates excite or scare you?