DOES A LOW-INTEREST ECONOMY = LOWER RETURNS?

In August this year, the Board of the Reserve Bank of Australia lowered the cash rate by 25 basis points to just 1.50 per cent. While this is great news for mortgage holders, it poses certain obstacles for investors looking for strong returns.

Investing in Fixed Income Assets, such as bonds issued by the Government, and Corporate Bonds issued by large corporations are an option for investors looking to generate income. However, the returns have been reducing. Although the income returns are at historical lows, they provide greater security with investors’ capital.

Shares, on the other hand, are expected to provide higher returns than Fixed Income Assets, but these are also more volatile, which could lead to a loss in capital value.

There are many other investment options, including Direct Property, Listed Australian Real Estate Investment Trusts (A-REITs), Hedge Funds, Hybrid Securities and Unlisted Trusts. Each has its own characteristics and associated risks.

And what of traditionally ‘safer’ methods of return, like Term Deposits? Term Deposits can certainly play a role within an investor’s overall portfolio. Once you start moving away from them, you are increasing your overall risk substantially.

In a low interest-rate economy, investors need to seek professional advice from a financial adviser to structure their investments and ensure income requirements are being met.