Wading into riskier waters

You wouldn't run and jump head first into an unknown body of water. You'd wade in, check the temperature, test the depth, and look for submerged objects. Sure, it's not as fun as a swan dive but it's a hell of a lot safer.

Ironically, the swan dive is exactly what many term deposit holders are considering. With term deposit rates a fraction over 2%pa and inflation at 1.6%, this leaves you with a real return of 0.4%pa. Those with maturing term deposits face a difficult dilemma. Do you stick with so-called safety or dive into riskier assets?

The thought of moving into a stock market hitting all-time highs is paralysing. You need to remember, it doesn’t have to be all or nothing. You do not have to jump 100% into the market. You can take a sensible, balanced approach to the problem.

Consider a balanced fund or portfolio. With a balanced fund you are still maintaining the safety of a large cash and fixed interest position, but also blending in the potential of capital growth and dividends through Australian shares, international shares and property. This blend can help you earn a better return than term deposits while not jumping 100% into the riskiest end of the asset class pool.

The graph below shows the total returns (capital growth plus dividends) of the average balanced fund compared to the All Ordinaries Index. While the stock market has beaten that, what is interesting to note is the lack of volatility through some of the markets most extreme downturns.

The first thing you will notice about the below chart is the difference between the two returns. Yes, the market has substantially beaten a balanced portfolio over this timeframe, however, the balanced portfolio is a far smoother ride.

The cash and fixed interest component acts as an anchor in bull markets and as a buoy in negative markets. The feeling of contentment when you’re living off your portfolio and sleeping well at nigh is far better than the fleeting excitement of a stock market rally. And the fear of missing out is dwarfed by the fear of permanent loss.

Diving head first into murky waters isn’t brave. It’s stupid. Going 100% from capital-guaranteed term deposits into riskier asset classes is similar. The water might be just fine but you can enjoy it all the same by gently wading in.

 

Click here to find out more about the InvestSMART Diversified Balanced portfolio, part of our capped fee range.


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