Investing In A Low Interest Rate World

Good afternoon,

I just checked the CBA website and they have a ‘special offer’ term deposit of 0.35% for a 12-month investment. 

In other words, in return for locking away $100,000 for a year, you will receive $350 in return at the end of the year.

We are really living in the world of almost zero return on cash. This has had and continues to have huge implications on all investments and consequently returns. 

 When interest rates are low borrowing is encouraged.

This has led to the median house price in Melbourne increasing to $1,004,500. (Source: REIV)

ANZ are anticipating a rise in house prices of 17% for Melbourne throughout 2021.

Share markets around the world are also benefitting from low-interest rates encouraging investors. In contrast, the outlook for wage growth is bleak with predictions that wages will increase by less than 2% this year.

There is a huge disconnect between wages growth and asset appreciation in shares and property and this is largely explained by the growth in debt and confidence that interest rates will remain lower for longer.

Consequently of course the great risk for investment markets is an increase in interest rates.

Share markets operate on fear and greed and will respond negatively quickly if they think interest rates will increase.

Investing is more difficult with cash providing a zero return. Government bonds and fixed interest generally is providing very low and in some cases negative returns.

Over the last few years, we have reduced allocations to cash in client portfolios.

Of course, this tends to increase investment risk and consequently, we are looking for investments that provide some investment protection while also providing a reasonable rate of return.

We continue to diversify portfolios appropriately and look for share-based investments that provide protection through actively managing the portfolio and utilising other tools such as holding options to sell investments that benefit from market falls.

In other words, taking out a form of insurance.

Insurance premiums need to be paid of course but in an environment where we can reasonably only allocate limited funds to cash we believe this is warranted and appropriate.

Should you wish to discuss your own investments and get more information on how we are managing risk in the current interest rate environment please get in contact.





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