Over the last 12 months, lower interest rates1 have presented some attractive opportunities for investors who are prepared to ‘ride the investment storm’.
However, if the recent economic market ups and downs with Greece and China are giving you the economic jitters, you might consider moving your equities into cash to reduce the risk of losing your hard-earned money.
But be aware that taking a low risk, conservative approach over the longer term may not necessarily protect your investments or help you build wealth. In fact, you could end up with little or no gains and may not even keep up with inflation. As you get closer to retirement, conservative investments may be more suitable, as high risk investments could pose as a potential risk to your assets.
So what are the different investment options to consider in a low interest environment?
Like all investment strategies, you need to consider your personal situation – why you want to invest, how you want to invest and the level of risk you are prepared to take.
Here’s a quick snapshot of the main investment types:
• Cash investments, such as savings accounts attract conservative investors. Similarly term deposits offer assurance to investors who want to know exactly how much they will receive after a prescribed period of time. Term deposits are typically lower risk and attract lower rates of return2 which can make them less attractive, especially in a low interest environment.
• Fixed income investments, such as bonds, allow you to lend money to an entity (such as a company or government) to invest for a certain amount of time at a fixed or variable interest rate. They are considered low risk, but possibly offer a higher rate of return than cash investments because of the longer term maturity structure and the fact there is some risk of non-repayment by the borrower3.
• Managed funds are where your investments are pooled with other people’s money and invested by an investment manager to create income or ‘distributions’ which you receive at set times, as well as capital growth. You can diversify your investments across a range of asset classes, which means you can spread your risk and not have all your eggs in one basket.
• Property investment for both owner occupiers and investors can be a profitable, long-term investment. However, in a low interest environment, increased demand for housing can push up prices (beyond rents and incomes) resulting in a potentially higher investment risk if the market starts to soften4.
• Shares or equities are investments in companies usually bought through brokers or online stock broking services. They are exposed to daily movements in market prices and can rise and fall in value daily – right down to zero5. So they are considered to be a higher risk than some other investment types.
So what are the best investments to opt for when interest rates are low?
There are no perfect answers to this question – it really comes down to the level of risk you are prepared to take and what you’re comfortable investing in. Know your short, medium and long-term goals6 and understand that investments are subject to ongoing market fluctuations and investment cycles.
Minimising risk and the ability to access funds sooner rather than later are a couple of good reasons to shift to cash investments.
However, if you are looking to invest in the longer term, remember to diversify your investments and keep a level head, resisting the urge to change your investing style as soon as there is a change in investment returns.
While term deposits may provide short-term sanctuary for your investments, you may also want to consider spreading your investments to include corporate bonds, property, infrastructure and shares to help you build wealth over the longer term.
Want to know more?
Like all savings strategies, consider the investment basics and putting money aside for a rainy day or an emergency.
If you still feel like you need to know about more about how and where to invest, we suggest you speak to a financial adviser or call us on 131 267. We’re here to help.
Where to now and what it means for investors