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Over the past couple of years there has been a trend toward fixed interest investment fed by the collateral damage caused to investors by the GFC and the fear factor emanating from Europe. These factors, together with the political unrest in Australia and uncertainty surrounding the knock-on effect of the carbon tax, have forced investors to abandon equity investment and a flight to cash-based investments mainly with banks. There are currently record levels of savings and fixed interest investment amounting to around $2 trillion. Industry sources suggest that unusual levels of cash are being held by investment platforms and there has been a net outflow of funds from managed equity funds.
Of course it goes without saying that a properly designed asset allocation should underpin any good investment strategy. However, the failure to recognise the power of equities as an effective inflation-proof income strategy has caused investors to lose sight of the short term benefits of having a long term investment strategy: income!
We have seen interest rates fall though to 2008/09, then rise again in 2010/11, then start to fall again. It is likely that we will see further interest rate decreases in the near future which could render fixed interest rate returns at little more than inflation. This is a massive problem for investors who fail to understand that whilst their fixed interest investments may retain their face value, they lose their buying power by the rate of inflation every year, so that they are actually losing money.
Whilst admittedly, it has been a horrible time for equity investors in respect to the perceived market value of their investments, they have actually done very nicely in respect to income particularly if they had been faithfully re-balancing their portfolios and buying extremely attractive dividend income streams through quality shares.
Short-termism is the biggest mistake investors can make as it converts intelligent, long term investment strategies into short term speculation – big mistake!
What many investors often don’t realise is the difference between investment risk and market risk. Investment risk relates to the individual investment, and market risk relates to the overall market reacting to external forces like the Europe debt situation. Market risk does not directly indicate a specific risk relative to a particular share, nor does it relate to the ability of that share to continue to pay dividends.
The most graphic example of market mis-pricing during the GFC was Australian banks which were marked down 50% by the market in 2009. However, bank profits were only really affected by doubtful debt provisions and their dividends marginally reduced, now they have quickly returned to record profits and dividend rates restored to a higher level than pre GFC.
It is currently possible to buy dividend income streams of up to 10% gross per annum through quality blue chip shares with future capital growth potential. This compares to term deposit returns of less than 6% (and falling) with a guaranteed capital erosion of 3% per annum, being the current rate of inflation.
Investors need to seriously consider short term income as well as longer term capital growth when evaluating equity market exposure.
Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email email@example.com or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.