Strategy Tailored For You
It is a turbulent time both in terms of financial markets and the news that drives them. At times it seems impossible to stay on the right side of history, as today’s headline becomes old news over the space of a weekend. At the moment the mood among investors is worried. They are worried that the crisis in Europe will drag on like a bad dream that never ends. They are worried that the falls in Australian stocks (driven in part by lower corporate profits in the first quarter) will continue. They are worried any slowdown in China will have an effect on their standard of living.
More than anything, many investors feel powerless to do anything about it. This led many investors to retreat to what they saw as the safe haven of cash and term deposits. Given recent history it seemed the safest route. However, with cash rates in Australia being reduced for the second time in two months and the continued reduction in the rates offered on term deposits, the attractiveness of this strategy is rapidly drawing to a close.
For an Australian investor the key theme of the past 12 months has been the continued reduction in income from those investments where investors could be guaranteed their capital was safe. In that time term deposit rates have fallen around one percentage point. For a retiree depending on term deposits to live on this is a reduction of 20% in their income – not trivial. Cash rates have fallen even more to around 3.25%.
On the equities side of things in the past year the Australian sharemarket has fallen around 10% in total. When you consider that companies distributed around 4% in dividends the capital loss becomes more like 14%. In the current market the Australian sharemarket is yielding around 5% in dividends, and when franking credits are taken into account the yield is closer to 6.5%. Just from an income perspective (and the fact that the market is cheaper) we would expect many investors that have been sitting on the sidelines will look to take advantage of this yield.
In international equities we have witnessed one of the benefits of diversification. Australian investors generally invest in overseas sharemarkets on a currency hedged or currency unhedged basis. When the investment is hedged the Australian investor receives the same return as investors in each of the individual countries. On an unhedged basis Australian investors receive the foreign sharemarket return plus any difference between the Australian dollar and the currencies of those sharemarkets. In the past year overseas sharemarkets fell around 7% (when measured in their own currencies). However, the fall in the Australian dollar meant that the returns to unhedged Australian investors, while still a loss, was kept to a more acceptable -1%.
The purpose of this letter was to show that there are always opportunities. At the moment we believe the best opportunity is in being invested, not all in or all out, but in a diversified portfolio of different asset classes. Please contact our office if you would like to discuss your portfolio positioning in the current climate.
©2013 PlanBiz Financial Services
The advice on this site may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.