Low rate may cause cash rethink
THE recent 0.5% cut to the official cash rate by the Reserve Bank of Australia (RBA) is good news if you have a home loan.
But if you are an investor with cash on deposit, chances are that the rate your money earns will also head south. That makes now a good time to review your investment strategy as bargains, and potentially higher returns, may be available in other asset classes.
Australian shares for instance have enjoyed year to date gains of around 11% (as at 3 May 2012). Shares should always be regarded as a long term investment especially when it comes to capital growth. However dividends paid on shares can be a regular source of income. They are also a lot more tax-friendly than interest earned on a savings account as shareholders receive tax credits when a dividend is paid to you out of taxed company profits.
While many investors have shunned the sharemarket since the onset of the global financial crisis, Australian shares have recovered part of the losses experienced when the market tanked a few years ago. The S&P ASX 200 Index, which measures the performance of the largest 200 companies (by market capitalisation), sunk to almost 3,000 in early 2009, down from its peak of almost 7,000 in late 2007. It's currently hovering around 4,432, so there are still good buying opportunities available.
Successful investors follow a strategy of buying when prices are low and selling when they are high. This why it is worth taking a look at shares while the market remains subdued. I can't say for sure how the sharemarket will perform over the next one, five or ten years though I do know that all too often people stay out of the market until prices have risen. By this time the lion's share of the gains have gone to those who invested earlier.
To add to the appeal of shares, online brokerage rates have generally trended downwards. Today, you're likely to pay around $20 brokerage to trade $5000 worth of shares online, hardly a hefty fee. However the catch with cheap online brokers is that they do not provide any share selection advice. If you want advice you can get it, but it costs. Full service (advice giving) share brokerage rates vary, but a charge of around 1% of the value of the trade is fairly usual, with a minimum brokerage fee of about $70 to $100 per trade normally applying.
If you're not confident about which shares to pick, it may be worth thinking about investing in a managed share fund, which does the share selection for you.
The key point is that falling interest rates make cash investments less attractive. Sure, cash has a role to play in every portfolio but I reckon the time has come to reconsider whether the safety of savings accounts and term deposits is sufficient compensation for the low returns you can expect to earn.
For more ideas on where to invest, take a look at my guide - 'Ten keys to Successful Investing', which you can download from www.paulsmoney.com.au
Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.