There is no better time to consider switching from a cash term deposit mentality to a diversified investment portfolio one, here’s why.
Yesterday the Reserve Bank of Australia (RBA) handed down its official interest rate decision. As widely predicted the RBA cut the official interest rate by 0.25% to a new record low of 1.25%. This is the first cut since August 2016 and is aimed at supporting employment growth and in achieving progress towards the inflation target range. But what does this mean for you and your everyday?
Expect a reduction in your interest rate and in turn a reduction in your income. If you have a term deposit coming due soon, the rate you will be offered will certainly be lower. You would be lucky to get an interest rate of 2.5% per annum with a major bank, which only provides an income of $25,000 per annum on a $1 million investment. The market anticipates a strong likelihood of another interest rate cut in coming months, so there is only going to be further downward pressure on these rates and less income in your pocket.
Lucky you! Diversification is about spreading your risk, instead of putting $1 million on term deposit at the bank you invest your accumulated wealth and hard-earned savings into a portfolio of various assets that earn the highest return for the least risk. A typical diversified portfolio has a mixture of stocks, fixed income and property. When specifically thinking about term deposits, we’re able to provide clients with exclusive access to high quality fixed income solutions that can deliver exceptional income, despite the low-interest rate environment.
By designing bespoke portfolios for our clients to achieve their specific objectives, we have confidence in delivering a strong income return. Whilst each portfolio is unique, we have a track record of consistently delivering a net income return of 5% per annum, or more. We would also expect capital growth on the investment portfolio in addition to this income. That's double what a person with $1 million on term deposit could expect to receive or an extra $25,000 per annum into their pockets.
This is also why we don't expect the interest rate cut to have a significant impact on our client's portfolios. By diversifying our clients’ portfolios protection is provided from most market fluctuations over time.
Expect a reduction in your loans interest rate and your repayments. To what extent, depends on your lender, it appears only CBA and NAB will be passing on the full rate cut to consumers. If you have non-deductible debt such as a home loan, a rate cut is always a great opportunity to keep your repayments at the same level (even if you don't have to) to repay your loan quicker.
What does this mean for the following markets and does a rate cut equal good news for everyone?
There is continued talk of further rate cuts this year, which begs the question as to why you wouldn’t consider reviewing how diversified your portfolio is to meet your objectives and income needs. Diversifying is your best defence against single events, such as interest rate fluctuations, if you’re in need of reviewing your financial plan we’re here to help.
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 firstname.lastname@example.org or visit www.hewison.com.au
Please 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.