Successful investing means moving beyond property and cash – The Australian Financial Review

Some investors have based their retirement strategy on rising property prices.

by Mark Eggleton

This content is produced by The Australian Financial Review in commercial partnership with Perpetual. 

When Gold Coast-based financial advisor Troy Theobald talks to new clients their greatest fear is retirement and whether they are going to have enough income. Feeding that fear is the worry their superannuation savings might be affected by an adverse event, so there is a tendency for many investors to think conservatively about how they invest.

Theobald, who is the financial services director of Robina Financial Solutions, says people need to better understand they are going to be a long-time retired and realise it is a long-term investment timeframe.

To put it bluntly, unless Australians start working significantly longer, retirement means needing around 30 years of income to live a relatively comfortable life. What investors do not want is to run out of money and have to rely on the aged pension in their last years as the cost of maintaining their health steadily rises.

Throw in a genuine fear of a cataclysmic event such as a global financial crisis or North Korea and the United States going at it hammer and tongs and people generally become even more conservative in their investment strategies.

The problem Theobald suggests is fear stops people from investing and then they are walking into longevity risk as they invest in what are perceived as safe options such as the bond market which, at current levels, could struggle to provide a return that keeps up with inflation.

According to David Hudson, the head of asset allocation, multi asset, at Perpetual, Australians really need to take a closer look at a diversified investment portfolio. He suggests investors can be over-exposed to bonds because they are trying to mitigate against downside risk, but it is not really a winning strategy.

With Australia still enjoying solid economic growth and a long east coast capital city property boom, many Australians have decided the safest bets are property investment and cash. It is a simple strategy but not necessarily well thought out.

Granted the Australian experience has been a good one for 26 years. We have been a “huge beneficiary of the China boom and globally we have been insulated to some extent from the big falls and hits”, such as the GFC and when the dotcom bubble burst, but the two big risks in portfolios are property and too much exposure to bonds. The reason is that, unlike the early 1990s, when bond rates were high over a 10-year period, if you look forward now local bonds are trading at 2.5 per cent for the next 10 years.

“What you’re doing is locking in a poor return.”

Moreover, just last week Bloomberg again highlighted Australian households are the second most-indebted in the world and, as we ratchet up the debt levels, we are also having more trouble servicing the debt. The reason being that real wages are not growing – a concern the Reserve Bank of Australia has raised numerous times this year.

Furthermore, earlier this month UBS Group Economists suggested our record property boom is officially over and, if the Reserve Bank raises rates suddenly or too quickly, the results could be catastrophic.

Hudson suggests investors have to look at truly diversified portfolios that are not based around a couple of asset classes such as property and cash. More importantly, people need to start thinking about their retirement a little earlier. Starting earlier with a diversified investment strategy takes the risk out of one-off events nearer to an individual’s retirement date.

Moreover, the decision to avoid risk in the pre-retirement years means locking in low returns, which may mean having to take more risk later on.

According to Hudson, Perpetual builds investment portfolios from the bottom up. Moreover, a good diversified strategy should reduce an investor’s exposure to particular markets without reducing returns.

It is also important to understand markets are not one amorphous mass. For example, the credit market is not one market – there is floating credit and fixed-rate credit.

“Investors have to start with the question of ‘what will protect me from inflation’ and then think about how to generate returns 5 per cent above inflation.”

“They need to think of downside protection and there’s a broad array of instruments such as put options, bonds and precious metals. The key is to rotate through these and invest where best the insurance is. You’re building a portfolio of exposures rather than one built around particular asset classes.

“A properly diversified fund should be able to take any asset to zero if the risk outweighs the return. It’s vitally important to have that flexibility.”

This Article Was Originally From *This Site*

Powered by WPeMatico