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With New Zealand interest rates at their lowest level in 50 years, I am seeing an increasing number of retired clients that are looking for better returns than are available from bank term deposits.
This can be a challenging time for these clients as, for many of them, it is the first time they have considered investments beyond term deposits.
Within the financial industry there is an acronym, TINA, which stands for "there is no alternative".
The acronym recognises that for a group of clients there is no alternative but to diversify beyond fixed interest investments alone.
The stark reality is that if they continue to limit their investments to fixed interest alone, it is likely they will exhaust their retirement capital prematurely.
For others, the situation is more finely balanced. It could well be that because of the level of capital they have, or their modest annual drawings, being invested in fixed interest alone may still allow them to meet their objectives.
This environment is challenging for clients and investment advisers alike. Clients are looking for that "holy grail" investment that offers a high return, is capital stable, has high security and high liquidity (i.e. it can be accessed readily at no cost).
Sadly, this combination of attributes is only offered by the tooth fairy. Although I have made this point with humour the sentiment is very real.
These characteristics seldom coexist and any investment that purports to offer them in a single package should be treated with a high degree of scepticism.
The professional adviser will embark on a discussion that will focus on the trade off between these attributes.
What return do you actually need to achieve?
This is something that your adviser should be able to calculate for you. Modelling software will allow you to see how long your capital is likely to last given an agreed mix of investments and level of withdrawals.
What degree of variation of return are you willing to accept (and emotionally tolerate) in the pursuit of a higher return?
This question is sometimes not quite so easy to answer. It is important to understand how market forces may change the capital value of your portfolio and how long it may take for your capital to recover when the next market correction occurs. You need to start any new investment strategy with an understanding of these facts. This will reduce the chance that you will be frightened out of the market at precisely the wrong time.
Security is a critical consideration and sometimes not as easily assessed as one might think
With some fixed interest securities, a credit rating may be available. But interestingly, over the last 20 years I have seen more money permanently lost on fixed interest investments than I have seen lost on shares. Clearly this risk can be deceiving.
If you are going to invest in something that is not easily sold, how do you incorporate this investment as part of an overall strategy? And how much additional return should you demand if you are going to accept this risk? This is not to say that all of your investment must be immediately accessible (i.e. able to be cashed up at short notice). But it is important to ensure that the portfolio is structured in a way that allows sufficient time for less liquid assets to be sold in an orderly fashion if need be. If you are going to accept that some of your portfolio is locked up in some way, then the return on that part of the portfolio should be higher to compensate you for this risk.
Historically, fixed interest returns have followed the business cycle - a period of low interest rates has then been followed by rising interest rates as central banks have used monetary policy to slow economic growth and limit inflation. However, at present all the economic signals are suggesting that fixed interest rates will be lower for longer than previous cycles.
This means retirees that rely on investment income to supplement their NZ Super need to seek advice if they want this income to continue in a sustainable fashion.
- Peter Ashworth is a principal of New Zealand Funds Management Ltd, and is an authorised financial adviser based in Dunedin.