Investors ride risky interest rate rollercoaster

INVESTORS are being warned to be careful where they tread as record-low interest rates deliver mixed returns on their money.

The sharemarket is flirting with fresh record highs and property prices are climbing in some cities, but cash deposits and fixed interest investments are struggling to match inflation.

People need to be realistic about income expectations and avoid dangerous financial products that have been dressed up as safe places to park money.

William Buck’s wealth advisory director, Adrian Frinsdorf, said the aim should be to “generate a regular and consistent portfolio return rather than a volatile one full of broken promises”.

He said investors chasing higher returns were being targeted by promoters of higher-risk products such as unrated bonds.

“We’re seeing more structured products, high yield bonds and derivatives offering returns of 5 per cent and above,” Mr Frinsdorf said.

“If the investment has no growth potential, the risk is not worth it.

“There will always be an element of risk in investing – you just need to be rewarded for it. Risking 100 per cent for a maximum return of 5 per cent just doesn’t make sense.”

Mr Frinsdorf said Australian shares had had a good year but companies were struggling to lift profits in the weak economic climate.

“Yet when the alternative is 1 per cent in the bank account, equities still appear attractive, and buying quality shares on the dips remains a prudent long-term strategy,” he said.

“Having a blend of international managed funds can also help spread risk and boost exposure to a wider range of markets.”

Certified financial planner Peter Foley said low rates led to investors piling into highdividend paying stocks such as banks, but this was risky.

“Banks will find it hard to pay the same dividends when their profit margins are lower,” he said. Mr Foley said today’s investors needed a longer time frame. “You want at least five years, but preferably seven or more,” he said.

“This allows you to ride out the market ups and downs that inevitably happen in the short-term.”

Mr Foley said anyone feeling out of their depth should ask for help.

“I see too many people who have made panicked decisions that only make things worse,” he said. “Whatever asset class you invest in, you’re sure to have your ups and downs.

“It’s important to remind yourself at those times that you must be disciplined with your approach.”

Real estate investors are enjoying some financial sunshine as low interest rates lower their costs while rents rise or remain the same.

Mr Frinsdorf said positive gearing – where rental income was higher than holding costs – was emerging in several markets.

But property investment was not simple, he said. “A number of factors beyond rates need to be considered, from rental demand to subdivision profit margins.”