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AUGUST 2013 • BROUGHT TO YOU BY FINANCIAL WISDOM
Alternative avenues for risk-averse investors
Global macro-economic variables are affecting returns in what we once considered to be
lower-risk asset classes. Here we look at other options available to the risk-averse investor.
As we see-saw our way through an uncertain and
unpredictable economic period in which events
around the world inevitably affect the value of our
own portfolios, some assets traditionally viewed as
lower-risk (of course, no investments are without
risk) have begun to appear more volatile.
Those in the low-risk category would be wise to
diversify their investments within this portfolio.
But outside of cash, the family home and blue-chip
shares, what other alternatives are available?
The first to consider is bonds. If you buy a bond,
you’re essentially lending money to a business, or
a government body, with an agreed date of return
and an agreed rate of interest. So rather than
buying equity, as you do when you buy shares,
you’re instead becoming a lender or buying debt.
Interest is most often paid annually, every six
months or quarterly, offering regular and
predictable fixed income. Then the principal is paid
back at an agreed date.
Of course, a bond is only as reliable as the body
that is doing the borrowing, known as the ‘issuer’
of the bonds. One bond investment, for instance,
is a Commonwealth Government Bond (CGB) that
essentially sees you lending money to the
Australian Federal Government to pay for anything
from social programs to major infrastructure
projects. CGBs will likely become a more popular
asset as our nation’s ageing population seeks
greater exposure to fixed income styles of
investments. The agreed rate of interest means a
specific rate of return throughout the period of the
investment can be planned for.
It’s also worth analysing the shares within your
portfolio in order to figure out how many are
cyclical and how many are non-cyclical. Cyclical
shares tend to fluctuate in value thanks to various
market pressures and economic cycles. Mining
stocks, for example, will always be at the mercy of
demand for their products. And tourism operations
in specific regions may have seasonal, and
therefore cyclical, demand.
Non-cyclical stocks, however, tend towards being
more defensive as they typically shrug off
economic ups and downs. They are not without
risk as any business can suffer unforeseen trouble
but these businesses, usually providing essential
services such as electricity, water, gas and toll
roads, are considered by many to offer lower risk
and greater predictability in turbulent economic
times.
So there are many options available to help
diversify and spread the risk, even inside a lowrisk portfolio. In order to develop a mix for your
specific circumstances and to seek even greater
peace of mind about your financial future, it’s best
to discuss your options with your financial adviser.
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Of little interest
Many market analysts and economists predict one
or two further interest rate cuts before we head
into 2014. Why do these cuts take place and what
do they mean for your investment portfolio?
The Reserve Bank of Australia (RBA) increases or
lowers the official cash rate to influence the pace
of economic growth and inflation. Cuts to the cash
rate can occur when the RBA believes that
economic growth requires a lift and that inflation
is contained. The RBA’s action is based on many
indicators including the level of the Australian
dollar, consumer and business spending and
confidence data and the pace of inflation.
Following the 0.25% interest rate cut in May, the
official cash rate reached a 53 year-low of 2.75%.
In financial markets, as with the broader economy,
changes in interest rates are significant. As a
result they can have a big impact on your
investment portfolio. What then would a further
0.25% interest rate cut mean to you?
First of all, interest rate cuts should stimulate
consumer spending. This is achieved by lowering
the cost of debt especially for mortgages, and
freeing up more disposable income. In addition,
businesses may be more willing to borrow and
invest in a lower interest rate environment. Lower
interest rates could also bring down the value of
the Australian dollar, helping Australian exporters.
However, a lower interest rate environment can
have a negative effect on retirees who may not
benefit from the lower cost of debt if they have
already paid off their mortgage. They could
experience a reduction in their income with a
decline in the interest rate earned on their
investments. This is an important factor to take
into account.
In the property investment arena, lower interest
rates usually encourage more buyers into the
market and help keep the market well supported.
While price growth had slowed in Australia, the
property market has not experienced the crash
that many markets in other countries have seen.
One possible reason for this is the record-low
interest rates, as well as Australia’s relative good
economic performance.
For those with mortgages, there is a discussion to
be had about whether you lock in some of your
mortgage to a fixed rate for a period of time, or
whether you bank on further cuts in the variable
mortgage rate.
The outlook for interest rates in Australia will be
heavily influenced by both global and local
economic forces. These includes signs of recovery
or further economic turmoil in Europe, the pace of
China’s economic growth and their demand for our
resources, ongoing recovery in the US economy,
the value of the Australian dollar, as well as
consumer and business confidence. None of this
can be predicted with a great deal of accuracy and
sometimes the RBA, quite rightly, takes a waitand-see approach. But when it does move, it’s
vital that you take note.
In an environment in which interest rate change is
a more regular occurrence, it’s vital to look at all
of your investments and financial goals in the light
of such change at least twice a year. You should
discuss the options that may be available to you
with your financial adviser.
Speak to us if you would like to understand more about how this may impact your financial situation.
Important information
This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom
advisers are authorised representatives of Financial Wisdom. John Smith of John Smith Financial Planning Pty Ltd (ABN XX XXX XXX XXX) is an Authorised Representative of Financial Wisdom Limited (ABN 70 006 646 108) AFSL 231138.
Information in this document is based on current regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities,
agents and employees for any loss arising from reliance on this document.
This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.
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