OF course the answer will very much depend in the first instance on your own personal financial situation, and it’s worth sitting down and discussing it with an adviser.
But here are some facts and current news to get you thinking. In March 2012, term deposit interest rates available at an Australian bank, held for 5 years, could get you around 6.5%. The peak of 3 year rates was in December 2009 at 7%. By May last year average rates had fallen to 6% and now the best 3 year rates are at 4.5%. That’s a significant drop, and savings rates are expected to fall further in 2013.
At the same time in calendar 2012 banks collectively reduced their home loan mortgage rates charged to homeowners, by about 1%, despite the Reserve bank reducing rates by 1.25%. So the gap (spread) it seems is widening in favour of the banks — paying less to savers in term deposits, and holding back rate reductions on mortgages.
Since late 2010 banks have been complaining about that spread, and the reduced gap between savings rates paid to investors, and mortgage rates charged to borrowers, justifying their reluctance to reduce mortgage rates in line with the RBA. Now, as that spread improves and global cash conditions are easing, it should mean banks become more willing and able to pass on future Reserve bank rate cuts. We shall have to wait and see if that is the case.
It’s interesting to see that Australia’s investment in term deposits has more than doubled since before the global financial crisis (GFC). Prior to the GFC Australians had $270 billion invested in term deposits, and figures late last year show that today, that amount is $600 billion. There is no doubt this reflects a conservative, cautious approach, spurred on by disappointing returns from stocks and the government’s guarantee of bank deposits. Security has been the mantra in investing over the last 3 years or so.
Cash is an important part of every investment strategy, however it appears to have an unusually high share of the investing pie right now, as people have a reduced level of confidence or fear in the stockmarket and generally in relation to overall economic conditions.
Sharemarkets have been boosted lately by news the US fiscal cliff-threat has been largely averted, and there is evidence coming from government bond movements in Australia that investors are beginning to factor in better economic conditions ahead.
This fact coupled with the decreasing interest rates, and reasonably attractive company valuations, means that at some point investors should be reconsidering equities and growth assets now, whilst cash savings and fixed return style investments are gradually producing lower returns, as they follow the cash rate downwards.
These general conditions cannot be assumed for Spain and Italy, and consequently the Eurozone, where for example Italian 10 year government bonds were at their lowest level since 2010 recently, suggesting some serious clouds remain on the horizon.
Equity prices are affected by several factors, but primarily they are driven by company earnings and cashflows (and investor sentiment over shorter time periods). For approximately 5 years in Australia we have seen lower than average returns from equity investments, but that trend will not necessarily continue. Long term averages point to this fact. Fixed interest and cash investments (like term deposits today) have underperformed sharemarket investments for over 100 years, since records have been kept. Of course, it takes a longer term view, and some risk, to step away from a security mindset.
Stocks are a long term investment, and should only be considered over at least a 7-10 year timeframe. Focusing on yesterday’s result or one week’s or one month’s stock movements will not help your portfolio, let alone your ability to sleep well! However now is the time to realise that you cannot rebuild any lost wealth from the GFC by achieving cash returns (from savings in cash) after tax of around 2-3% per year.
Consider dollar-cost averaging in shares. This is the smart investor’s strategy to accumulate the stocks of long-term successful companies, at various prices. Keeping your money out of the market and waiting for the price to rise will mean you will always be “late to the party,” returning to buy only when confidence is highest and when stock prices have truly recovered. It’s much harder to make long term gains with this approach.
Buying regularly, especially when prices are lower relatively, will mean that ultimately your overall purchase cost is reduced — helping you taking advantage when stockmarket weakness is present, and ensuring you can position yourself for long term gains.
This is not investment advice, but general information only. Any conclusions or consideration of your own investment strategy right now should take into account your own personal goals and objectives and be based on tailored professional advice. Good luck with your goals in 2013!
Daniel Shillito is a Financial Adviser, CPA and Expat specialist at Aussie Finance and Property Group, qualified both within Australia and throughout Europe. Daniel can be contacted on Ph. 020 3239 0479 or visit www.aussiefpgroup.com
Daniel and his company My Financial Life are Authorised Representatives (AFS number 306941 and 387510) of Patron Financial Services Limited, AFSL 307379.