Confusion in Investment Markets
Today, the Reserve Bank of Australia elected to hold the official cash rate at 1%. However, a further cut in interest rates remains a possibility before the end of 2019.
We now live in a world of record low interest rates, low inflation and slower economic growth. Consumer spending is weak, reflecting their concerns regarding low wages growth, stubborn unemployment, global trade tensions and high household debt. However, central banks around the world have confirmed their intentions to “do whatever it takes” to support their economies and so avoid a recession. Consequently, the future for investors is far from clear, with many tempted to take more risks to generate a decent return.
Looking at markets, investors have piled into highly priced (ie expensive) defensive assets such as bonds, utility companies and listed property trusts or technology sector companies which they perceive as “safe”, assuming they can maintain their recent profit growth for many years. By contrast, good companies in mature industry sectors remain “out of favour”, consequently their shares yielding attractive, sustainable (hopefully) returns can be purchased at lower prices. However, some believe that a continuation of the disruption we have seen from technology makes a recovery in their share prices a big challenge.
So, given that investment markets are exposed to significant risks, is it wise to ride the “growth” stock wave or alternatively, to look for better “value, while acknowledging that it may take some time before any profit is realised? In our opinion, investors should avoid assets that are expensively priced (these are likely to revert lower) and ensure adequate portfolio diversification both across asset classes and industry sectors.Those with a 7-10 year time frame and a high tolerance for volatile returns (or losses), can stay invested in riskier assets, but should still make adequate cash provision to cover both foreseeable living expenses (ie holidays, car upgrade etc) for the next 4-5 years and emergencies. Allocating money in this way is especially critical for retirees and those near retirement age, who may also need to adjust their spending to preserve their capital for longer. Others with short time frames and/or a low risk tolerance should primarily focus upon preserving capital despite the low expected returns.
Importantly, everyone is different in terms of their attitudes, needs, financial position, age etc. Simple rules of thumb are a poor guide when formulating a financial strategy. We are convinced that a plan tailored to the multi-facets of an individual is most likely to achieve your goals.
Pension Loan Scheme Extended
From 1st July 2019, eligibility for the PLS has been expanded to include self-funded retirees as well as full and part recipients of the Age and Veterans Pensions.
The scheme is administered by the Dept. of Human Services, and the loan is secured against property in Australia. The scheme pays non taxable fortnightly instalments up to 150% of the Age Pension rate, based upon your age, property value and current income support paid. The instalments are not subject to Centrelink means testing and lump sums are not available.
Interest accrues on the loan (current rate = 5.25%), which must be repaid from the property sales proceeds or the estate or other savings (if the proceeds fail to cover the accrued debt).
The PLS is complex. We also recommend consideration of other strategies such as reverse mortgages, home reversion schemes, borrowing from family and downsizing the home. You should also seek advice regarding the loan agreement, impact upon government payments, age care funding and the estate before making any commitment.