As widely expected, the financial year just ended was another good one for most superannuation fund investors, with returns above 10 per cent. They would have been higher and closer to last year's exceptional returns except for the higher-than-expected value of the Australian dollar and falling iron ore prices. Further, the prospects for this financial year are sound because interest rates are likely to remain at historically low levels, forcing yield-seeking investors to retain and even add to their share and property holdings.
Balanced and growth superannuation investors are likely to continue to receive solid returns on their overseas holdings of shares and property, even if the dollar remains at or above its recent levels. The returns available to cash and fixed interest investors are the only bleak spot in investment prospects.
Low interest rates overseas are providing cheap sources of funding for our major banks, resulting in a sharp fall in the term deposit rates offered locally. The interest rates on offer are now about 1 per cent a year lower than they were a year ago and much lower
than after the GFC. Worse still for risk-adverse investors, there's minimal prospect that the US and Europe will increase their official interest rates for some time yet.
Effectively, the low interest rate and quantitative easing strategies aim to stimulate activity at the expense of savers, especially retirees depending on their investment returns to live. Their only choice is to switch to higher-risk options involving the potential loss of capital.
High returns can generate complacency about the risks involved with investment choices. It is essential to ensure the risk structure of a portfolio suits individual needs and tolerance to deal with downturns. The biggest mistake made during and after the GFC was to realise investments and switch to cash while prices were down.
The recovery in share and property prices and solid income returns over the past three years has caused superannuation and share investors with diversified portfolios to recover all their losses from the GFC and see sound growth. Basically, share and property investments involve a time frame of five years or even longer to be able to sit out downturns. If there's a need for money over the shorter time, less risky investments need to be considered, despite lower returns.
To be forced to sell shares or property when the market is down crystallises losses thatwill be very difficult to recover, especially in retirement. It always pays to make sure that there are assets to be drawn on to meet future needs when markets turn down.
Restructuring portfolios now is a much less painful.