Rate cut yields a setback for millions
'Term deposits are capital guaranteed by the government.' Photo: James Davies
LAST Sunday, I was assuming a rate cut by the Reserve Bank while sparing a thought for the millions of Australians who are either retired, or saving for it, and are relying on yields from cash investments.
A movement downwards in interest rates saves the mortgage holder $50 or $60 a month, but the same movement means less income for the cash investor.
During the week, I received scores of emails from cash investors who are either retired or are on the verge of it. Some of their retirement savings are in the hundreds of thousands of dollars and they are alarmed at the direction of official interest rates, which hit 3 per cent last week and reached the same level they were at during the worst months of the global financial crisis in 2009. These people are alarmed because with inflation at 2 per cent (and core inflation at 2.8 per cent) and the average cash yield from banks at 3.5 per cent (soon to be lower), their investments, while low-risk, are not earning much more than the cost of living.
These people's circumstances are not unusual. They have either opted out of using a financial planner, or they have a planner but are not satisfied with the advice they are receiving as a cash investor. A lot of these people have retreated from shares due to their volatility, but now find themselves relying on either money in transaction accounts or term deposits.
Yes - transaction accounts!
Many readers will see themselves in this slice of the population. In the latest Australian Taxation Office breakdown of the investments in self-managed superannuation funds, the largest asset class is ''cash and term deposits'' at 30.7 per cent.
The retreat from market-driven investments such as shares, into government-guaranteed cash, has made people feel safe in the short term, but now also vulnerable.
So what to do? Here are some thoughts:
1. Transaction accounts, cash-management accounts, term deposits and accelerated savings accounts are all capital guaranteed by the government up to $250,000 per person. They are all zero-risk.
2. You can find a better yield than a transaction account's 0 per cent without taking on more risk. I'm sure the institution you save with
will have another product that rewards savers by paying them up to 4 per cent, and they also have term deposits that pay more than that. Within the ''cash and term deposit'' class of investment, find the spread of yields by using online comparison sites.
3. You can diversify your investments within capital-guaranteed investments; you don't need all your cash in one account. Why not have a lump of funds constantly being rolled over in 90-day term deposits, and some others in one-year term deposits? Then have a large amount of your savings in a high-yield online savings account, and have the interest paid into your transaction account - the one paying little interest.
4. Don't forget bonds. Bonds can not be accessed by retail investors - they are a wholesale and high net-worth investment. Typically, they come in the form of government bonds, corporate bonds, bank bonds and bank-covered bonds. Many bonds are low-risk debt products that yield good returns. Although they are reserved for the professionals, those professionals allow retail investors to invest in them, usually in a retail fund environment. Some of these funds have been returning as high as 7 per cent to 8 per cent a year to their investors. Some of them are known as ''fixed interest'' funds because they invest mainly in government and corporate bonds, with fixed returns. Other, newer active cash funds invest in a combination of bank deposits, with the balance mostly in bank bonds with variable earnings returns.
5. Get advice. From what I am seeing from the emails triggered by last week's column, cash investors are staying away from advisers or they are unhappy with the amount of interest shown in cash investors by advisers. I suggest that instead of dropping out of financial advice altogether, that you search for a planner with an interest in cash-investment strategies - including diversification and an allocation to bonds - and adopt a more active approach. One of the unfortunate side effects of cash investment is that it is too often a ''set and forget'' reaction, which is no strategy at all.
If you look at all of the cash and bond options, your available yields move from zero to about 8 per cent a year.
As interest rates move down, your job is to find more yield with little risk. I would be interested to see how you go. Send me an email at firstname.lastname@example.org.