Australian investors are struggling to generate income from conservative investments such as bank and term deposits. Placing your hard-earned money into a one-year bank term deposit will only yield 1.3% (blue line). According to the Reserve Bank of Australia’s (RBA’s) data, this is the lowest term deposit rate since the records began in 1981. Indeed, the current 1.3% term deposit rate is even below Australia’s 1.6% inflation rate for the year to June 2019. For the first time investors appear set to earn less than inflation in these challenging times.
Australian shares with their current dividend yield at 4% should be more appealing to investors (red line). However, the Australian ASX200 share dividend yield comes with the risk of more volatile investment returns. Being a share investor means being subject to the ups and downs of capital gains and losses as well as the benefit of dividend yields. This is a global predicament for investors. The recent RBA Financial Stability Review highlighted that the extended period of low global interest rates “has encouraged investors to take on more risk, raising the possibility of financial stress if a sharp reversal in asset prices should occur.”
What does all this mean? Whilst there is never a one size fits all investment approach, in the current market the value of diversification cannot be underestimated. Having some money set aside in the safe, although low return cash/term deposit market can be coupled with an investment into the sharemarket to enhance returns over the longer term. By ensuring you have funds available when required you can ride out any short-term fluctuations in sharemarkets.