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What falling interest rates mean for investors

The Reserve Bank of Australia's official cash rate is at a record low of 1 per cent, with further cuts predicted as the central bank strives to offset perceived economic weakness.

     

 

In the United States, the outlook is similar. The U.S. Federal Reserve, which in January was expected to raise rates, is now on a path to lower them.

What has changed so quickly, and what does it mean for investors?

Around the world, economic uncertainty has risen on concerns that a trade war might limit growth. In addition, job-market indicators signal weakness.

In Australia, unemployment is above targeted levels, and wage growth has hovered at a relatively sluggish 2.3 per cent, In the United States, where unemployment remains near the lowest level in 50 years, strong job numbers have not generated significant wage increases. That may explain why inflation, the traditional target of central banks, has lingered below expectations. Workers can't spend money they don't have. Those are the immediate conditions that shifted the conversation from rate hikes to cuts as "economic insurance."

Over the longer-term, the 2008 financial crisis modified central bankers' approach to monetary policy. Years of low interest rates have pumped money into the global economy but have not fueled inflation. Inflation's vanishing act, combined with persistent economic lethargy, has tilted central bankers' bias toward quick action.

Over the short term, reduced interest rates tend to boost share returns because investors believe monetary stimulus will improve economic prospects. Lower interest rates also push investors to seek the higher relative return of shares.

Those are generally short-term effects, however, and investors should focus on the long run. While interest rates may potentially represent an opportunity to refinance your house, they should not cause you to veer from a carefully planned investment strategy.

Changing rates do reinforce some long-term investing principles that can be helpful to remember to maintain discipline:

  • Don't reach for return. Vanguard forecasts that share returns are likely to remain at about 4 per cent to 6 per cent, below historical averages, for the next decade. While this is a reasonable return, it may tempt some investors to increase risk in the hope of greater reward. Vanguard research suggests that strategies, such as investing in lower-quality bonds that pay higher rates of interest, rarely pay off. Instead, sticking with a low-cost, diversified portfolio that captures returns from global shares and bonds and matches your risk tolerance provides the best chance for investment success.
     
  • Control what you can. You can't control financial markets, so focus on what you can control. If you are concerned about lower returns, consider saving more or working longer. Keep investment costs low to avoid eroding returns.
     
  • Understand the role of bonds in your portfolio. Bond prices fluctuate with interest rates, but remember that income is only one reason to invest in bonds, and not the most important one. Bonds' bigger role is to protect against volatility in the share market. For example, in 2008, the Australian share market fell 38.9 per cent; Australian fixed interest, as measured by the UBS Australian Composite Bond Index, rose 14.9 per cent.

Interest rates will always move up and down. Don't let your investment strategy bounce around with them.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
30 July 2019
vanguardinvestments.com.au

 


David Forrest Download David's Adviser Profile

David Forrest

Director
BEc (Acc), MBA, CPA, FFin

David has been in the Financial Services Industry for nearly 30 years. He was one of the founding Directors of the successful Financial Planning and Stockbroking Practice, Henderson Gregory Forrest, for a decade. Prior to that, he held senior roles in companies such as ING, KPMG Accountants and AMP. David was previously Chairman of OAMPS Superannuation Trustee Board and currently serves as an independent Board Director for several companies.

David’s extensive experience in all forms of superannuation, including Self Managed Super Funds (SMSF), Defined Benefit Funds, retirement funding through Account Based Pensions, stockbroking with a focus on Direct Share Investment, Taxation/Remuneration Planning, Centrelink, Aged Care and business management, equip him to advise expertly on all aspects of Financial Advice.

Those with a particular interest in superannuation/SMSFs, direct share investment, salary packaging or applying for the Centrelink Pension will find his knowledge and ability in formulating and implementing creative, logical and simple wealth creation strategies a valuable asset.

David maintains a strong personalised client service focus, providing tailored solutions for clients.

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David Forrest is an Authorised Representative of Integrity Financial (SA) Pty Ltd ABN 16 133 921 187 — AFSL No 334846

Michelle Forrest

Michelle Forrest

Business Finance Manager
B Bus (Acc), CPA

Michelle’s career has spanned across the Financial Services, Retirement Living and Aged Care industries working in the private sector, not for profit and more recently with the state government for over 20 years. Her experience extends to many facets of the financial services industry, having worked in superannuation administration, technical support and financial planning practice administration.

Commencing with AMP and subsequently working in commerce and accounting roles with companies such as Brambles, Adelaide Bank Retirement Services, ECH Inc and SA Health and Wellbeing, Michelle returns to financial services after working in practice financial management at Henderson Gregory Forrest. This wide range of experience from senior accounting and management roles has provided Michelle with a strong background in business administration.

With an astute financial acumen and keen interest in business improvement strategies, Michelle ensures the smooth running of the Integrity Financial Advisory practice providing valued management support to our personalised client service focus.

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Natasha Bartlett
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Jasmine Smith

Jasmine Smith

Client Service Manager

Jasmine has worked in the financial services industry for over 12 years in all areas of client administration, working with David since 2013.

Jasmine has extensive knowledge and experience in client service including implementation of advice, portfolio reporting, assisting with the establishment of Self Managed Super Funds (SMSFs), term deposit management and a long history of helping clients with their enquiries.

Jasmine’s attention to detail, yet gentle approach, means she is able to solve the trickiest of questions for our client community.

Jasmine has gained her Certificate III in Financial Services qualification.

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Merrilyn Smith

Senior Client Service Manager

Merrilyn has worked in the financial services industry for over 11 years in all areas of client administration, and is a new addition to our client services team, returning from Melbourne to join the team in June 2019.

Merrilyn has extensive knowledge and experience in client service including implementation of advice, managed fund administration, assisting with the establishment of Self Managed Super Funds (SMSFs) and process improvement for the previous practices she has worked with. Merrilyn’s experience with direct shares constitutes the other part of our administrative support for direct equity investments.

Merrilyn’s warm and caring nature continues to endear her to our clients and she has already established herself as a valued member of our team.

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