Paul's Insights: Low rates see investors push the risk envelope

It's a sign of the remarkable times we live in that banks are offering home loans with negative interest rates. But in today's low rate world it pays for investors to take a balanced approach.

I was intrigued to read that Jyske Bank – Denmark’s third largest bank, is offering negative home loan rates.

My Danish is not up to scratch so I can’t share the finer points of the deal. However, the main point is that Jyske Bank has a 10-year fixed rate loan with an interest rate of -0.5%.

How a lender can make money on negative rate loans is a story for another day. Nonetheless, it highlights that very low rates are a feature right across developed economies, and it’s something investors need to navigate.

A growing number of InvestSMART clients have been in touch asking me what to do with term deposits that are approaching maturity.

Understandably, many are far from excited about rolling their money into another fixed interest account paying just 2% interest. The big concern though is that a number of these investors are thinking about switching all their cash over to shares in the hope of earning high dividend yields and decent capital growth.

Don’t get me wrong, I’m a big fan of shares. But suddenly going all out from cash to shares means jumping from one end of the investment spectrum to the other.

Yes, shares have the potential to earn higher long term returns. But they also carry a lot more risk than term deposits. We saw that recently when the local sharemarket reached new highs in July, only to dip by 4.5% in August.

That’s why it makes more sense to aim for something of a middle ground. This typically means a balanced portfolio, which blends defensive assets such as cash and fixed income, with growth assets including Australian and international shares.

The beauty of a balanced portfolio is that you get the reliable, predictable income of cash and fixed interest, combined with the long term capital growth potential and tax-friendly dividends of equities. And it can be done without completely diving into the deep end.

You can choose to build this type of portfolio yourself. An easier alternative is InvestSMART’s ready-made portfolios.

As a guide, InvestSMART’s balanced portfolio basically comprises 50/50 growth and defensives. It combines Aussie and global shares with property and infrastructure as well as fixed interest and cash.

Having this sort of exposure to a broad spread of investments is important. In these uncertain times, a diversified portfolio shelters your wealth from significant dips in any one market.

Sure, a balanced portfolio is not a like-for-like to term deposits but it’s a better alternative than 100% equities unless you’re prepared to wear a marked increase in risk.


Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.


Click here to view the InvestSMART Balanced Portfolio and click here to see how the average balanced portfolio performed during times of high volatility.


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