The incessant yo-yoing of sharemarkets is compelling all but the most intrepid of investors to the sidelines in the hope of avoiding the ensuing collateral damage to their portfolios. If it weren’t so damaging it would be fascinating the way fear and uncertainty trigger such wild swings – rational? Methinks not. The wise maxim “It’s not timing the market but time in the market” rings hollow in these times, as heading in at the wrong time of the cycle can result in years to a break even position, let alone earning a decent return on your money.
Again one wonders - with inflation running at under 3% and term deposit rates available at over 5%, why should we take any investment risk at all? Surely if we beat inflation and the taxman, we’ll be right?
Unfortunately, as a recent article in the Sydney Morning Herald proclaimed, those very cash devouring elements, inflation and tax, mean we end up with the most paltry of earnings on our savings (just $39 on $5,000 savings for someone on 31.5% marginal rate, and declining). Without tax incentives to save, it is not attractive at all. You can see why some people throw in the towel and rather spend their hard earned cash on a great pair of heels or a weekend away! But no, we have other options. Like how about the fully franked yield of 9 to 10% offered by some of Australia’s finest blue chips? But then we’re back to the roller coaster…
Another problem is this - the inflation rate released by the ABS represents the price increase of a basket of goods and services purchased by the “average” Australian household. That’s the rub – which one of us is “average”? Every age and stage of our lives yields different weights of the goodies in our personal baskets, and may skew our personal inflation rate higher (sometimes lower?) than average. If you have kids at private schools, you can only dream of an annual increase in fees limited to the rate of inflation. In reality it’s more like double that. As people grow older, their spending on items such as pharmaceuticals and healthcare services increases out of proportion with the “average”. The items that tend to pull the average down: technology, telecommunication, air travel and motor vehicles are often not the sort of things consumed by senior citizens.
And that is why even in the most conservative of portfolios, we financial advisers generally advocate a small element of “growth” assets, to counter that most uncertain risk of all – longevity risk. Longevity risk is a strange concept but all too common an outcome – the risk of outliving your capital. With inflation eating away at the buying power of our dollars, we do need to take some risk with part of our cash to go for growth and higher yields – so hold on tight, here we go!
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