Interest Rate Cut

Last week the Reserve Bank of Australia cut interest rates a further 25 basis points, bringing the official cash rate down to just 2.0%. The good news is that home loan interest rates should also come down which would save a household with a $250,000 loan approximately $52.08 per month.

However, what is the impact on savers and retirees with money in the bank? An official cash rate of 2.0% means that it will be hard to get an interest rate on a term deposit or savings account above 3.0% and retirees in particular may need to consider taking some risks with their savings to generate an adequate income.

It is times like this that I think a lot about perspective. Those people who are approaching retirement or recently retired are also the ones that had a mortgage in the 1980s when variable mortgage interest rates peaked at 17% and will now be lucky to get 3.0% on their cash savings. What must they be thinking at this time? 5 years ago, I had clients complaining about only getting 6.0% interest in the bank. These same people would give anything for 4.0% interest. So what lessons can we learn from this?

Firstly, it is always important to diversify your investments. Diversification refers to the philosophy of not putting all of your eggs in the one basket. By having a range of investments (cash, term deposits, bond funds, shares, property) you can spread your risk and smooth your investment return. Secondly, if your portfolio contains assets that can go up and down in value, it is important to decide, in advance, how much you are comfortable “risking” and how much you want in “safe” assets. Now, more than ever, the return you want will need to help drive this decision.

Lastly, always remember that if an investment is offering you a lot more than the official cash rate then they are taking risks with your money. What you want is a portfolio of quality investments that fluctuate with normal market movement. Anything that promises returns that are significantly higher than what the market is doing is “speculative”, while it is possible to make money on these investments, this type of investing should be considered gambling and you must be willing to lose all of your investment. Personally, I would steer clear from them.

If it looks too good to be true, then it probably is…