In your interest: Paul Clitheroe
To little surprise, the most common question coming to Money magazine at the moment is about getting some sort of return on cash. This really is a major issue for millions of us. As interest rates rapidly head towards zero – and in some countries they are already negative – what on earth do we do?
I do appreciate the point being made strongly by younger people that they have had the blunt end of the stick. Yep, in the 1970s my generation enjoyed free university education, so no debt to be repaid as we started work. Property was not cheap, but if we relate the price of property to a multiple of average earnings, there is no argument that buying a home today is significantly harder.
One win for younger Australians, though, has been interest rates. Our mortgage peaked at an interest rate of 18.75% in early 1990 and this was not a pleasant experience. As for most of our peers, our cars were sold to save the house and public transport became our form of travel. But savers were greatly rewarded. A term deposit peaked at around 16%.
Ironically, many of us paid our homes off some 20 years later, by which time rates had fallen to around 8%. With the mortgage gone and kids growing up, all of a sudden many of us had a few spare dollars. Popping this into super was a good plan, but a bit of cash on hand was lovely to have as a safety buffer. It does make me
laugh a little, but many in my generation have cleared debt at high rates of interest, just in time to earn next to nothing on our savings.
It really has been all downhill for rates paid on cash. With money, we can rarely all be winners. So those with cash are losing, while those with secured debt are winning. Seeing mortgages in the mid 2% region gives me great joy. It will help a new generation of people to own a home. But as I look at term deposits today and see around 1.5%, I really do scratch my head.
Like many people, I am in semi-retirement. So for the first time in my life, my wife and I need to draw not so much on our assets, but the income from our assets. As I have been banging on to Money show viewers and Money magazine readers for some 30 years, diversification is our friend. As we rely on our assets to eat and live, it is really important that we hold a couple of years of our spending budget in safe, liquid assets like term deposits. Everything else we keep in longer-term growth assets, things like property, shares and bonds.
Falling interest rates have murdered the return we get on our safe cash, but greatly assisted our other assets such as shares, held mainly in our super and property. I would not have held term deposits in the past, as when markets fell I did not need to sell assets to eat. Now with my declining income from work, life has changed. So I would use the term deposits as a source of funds, along with our dividends and rent, until markets recovered.
The solution to this period of very low interest rates, which I think is likely to be where we are for some time, is no different from what I said during times of high interest rates. Most of us are not gamblers or speculators; we are long-term investors, so a diversified portfolio of shares, property, bonds and a bit of safety money in term deposits is a pretty damn good way to go.
The right balance of these assets lies with you. It is about your attitude to risk. Your ability not to panic and sell when markets go down, which they will from time to time. And, of course, your time frame.
We are both in our early to mid-60s so statistically are likely to be around for a couple of decades. So apart from the addition of some money to term deposits, our portfolio remains exactly as it has always been: invested for the long term.
I simply do not see any other logical solution, with the exception of continuing to work part time for, I suspect, many years. I enjoy doing this and any money I earn goes to our lifestyle funding pot, taking pressure off the income and dividends from our portfolio.