While some thought that the combination of falling oil prices and a lower Australian dollar would act as a pseudo rate cut, the RBA thought otherwise, cutting interest rates to an all-time low of 2.25 per cent. Governor Glenn Stevens cited weaker growth and a higher unemployment rate as key reasons for the cut.

Interest rates have been in decline since November 2011 and are intended to encourage business investment and consumer spending, in a bid to strengthen the economy.

What does this mean for investors?

This is great news if you have a home loan as your repayments are set to fall. However, if you rely on interest from cash or term deposits to fund your retirement, your rate of return is going to decline.

The return on term deposits is currently a tick over three per cent. After factoring in the effects of inflation, the real return to investors from holding significant amounts of cash and term deposits is very low.

As a result, we typically see investors questioning whether cash investments are suitable to hold for the longer term. This helps drive other sectors, like the share market, higher as new money flows in. The dividend yield on Australian shares remains healthy at 5.5 per cent, including franking credits, which is far more attractive when compared to three per cent on term deposits.

Falling interest rates should continue to boost the outlook for company returns. It should also put downward pressure on the Australian dollar benefiting companies with offshore earnings.    

The key to managing external policy changes, such as RBA cuts, is to have a diversified portfolio with a good mix of income and growth characteristics that will see you through the longer term.