Bullish approach to profit in volatile 2022
Being aggressive is the only way Australians are likely to make money from investments this year.
The traditionally-conservative assets of cash and bonds are both set to go backwards in 2022, leaving higher-risk property and shares as the best mainstream investments to make a buck – but risks are rising after a strong 2021.
With interest rates near record lows, cash returns will be negative after the impact of inflation and income tax.
AMP head of investment strategy Shane Oliver said inflation was rising globally and that would result in higher cash returns and bond income yields “but it’s going to be a slow process”.
“We don’t see the Reserve Bank raising until later this year,” he said.
Rising bond yields initially hit investors with capital losses because existing bonds are less attractive than the new higher-yield ones. Bonds fell up to 3 per cent last year and Dr Oliver predicts a 2 per cent negative return in 2022.
“To get decent returns, growth assets are still the place to be, but I think returns are going to be more constrained than last year in shares,” he said.
“It feels fairly messy at the moment with Omicron, but we have seen these Covid waves before cause a short-term disruption and then you get a rebound.
“There is a risk it could turn out to be a negative year. After a strong year the risk is the next year may not be as good.”
Earning nothing or a slight negative return is better than losing 10 or 20 per cent if markets plunge.
“It still makes sense to have a well-diversified portfolio, even when you are not getting any returns out of low-risk assets such as cash and bonds,” Dr Oliver said.
Novo Wealth director Paul Garner said he expected 2022 to be more volatile for investors and without the “excellent returns” of 2021.
“We would encourage people to have a long-term strategy and stick to it, and not move in and out of asset classes,” he said.
The level of risk taken should depend on people’s life stages, Mr Garner said.
“If you have a 20-year time frame, be as aggressive as possible,” he said.
However, older people should consider being more conservative, with many keeping at least two years of their income needs in cash as a buffer. “Hopefully you never have to get into the situation to have to sell growth assets at the wrong time to fund income,” Mr Garner said.
Midsec Financial Advisers managing director Nick Loxton said he expected more volatility “but we don’t think it’s going to go crazy”.
“We come to work each day assuming there will be a big fall in the next five years,” he said.
“Will a crash happen tomorrow, in two years or any time in between? No one can tell that.”
Mr Loxton said cash was not a good long-term investment but should be held as a back-up.
“Don’t let cash burn a hole in your pocket,” he said.
“With volatility, the opportunities will come along.
“I’m starting to see people are getting more impatient about holding cash.”