On Tuesday the RBA reduced the cash rate to 2%, down from 7.25% in 2008. While most of the media attention has focused on how great this is for those with mortgages, little attention is given to conservative investors who are relying on income generated from cash and term deposits. This places these people in a tricky situation – do they hang on and remain in cash or do they bite the bullet and seek higher returns in the stock market? This tough decision is compounded further as it is asking them to risk their already reduced capital in an asset class that they have deliberately avoided, possibly since the financial crisis in 2008. In reality they are being forced to take more risk with less to fall back on if things go pear-shaped again. This is a problem that many retirees have been facing for some time around the world. Believe it or not, Australia still has one of the highest cash rates when compared with other western economies, such as New Zealand (3.50%), Canada (0.75%), Eurozone (0.05%), UK (0.50%) and USA (0.25%). This in stark contrast to countries like Sweden or Switzerland, who have negative interest rates – yes, negative – at -0.25 and -1.25% respectively.
A major concern for the RBA in setting interest rates is balancing out the need to stimulate a shrinking economy, whilst not encouraging more speculation on an over-valued housing market, particularly in Sydney. This is an unusual position to be in, as the economic needs vary from city to city, state to state. The general consensus from economists is that rates will remain low for some time.
So what is the correct course of action for a conservative investor? Unfortunately there is no “one size fits all” solution. The answer still depends on the individual investor’s appetite for risk, their time frame for investing and whether they are drawing down on their capital. Once these factors have been taken into account, only then can we suggest a portfolio that will increase the probability of delivering what they are setting out to achieve. Usually this will include a well-diversified spread of investments to manage the need for capital protection and regular income.