Investing in a low interest rate environment

Since August 2016 the official cash rate has been sitting at a historic low of 1.50%p.a. While this can be good news for those paying off a mortgage, it’s savers and those of us investing for income that find times like these tough.

Cash investments provide low returns which means if you are nearing retirement, you are going to have to save even more to reach your retirement goals.

It isn’t all bad news though. There are some options outside of cash that can be effective when investing for income during these times.
Before we share what options you can explore besides savings account and term deposits, it’s important to note that higher income producing investments do come with a higher level of risk. If that is something of concern to you then diversifying your investments and keeping some in cash options may work best for your individual circumstances.
We’ve put together some of the income producing investments you can take advantage of during low interest rate environments.

High Yield Shares

This is a popular option that a lot of investors turn to when interest rates are low. With shares, you are buying into a business’s success. Since interest payments are a major cost for business, lower rates can mean that business profits increase, and share prices rise.
Given the nature of the share market and like we have seen recently you will be exposed to increased volatility with this investment type. Expect to see share prices fluctuate making this a better option for longer term investing.
You want to look for shares that are not only healthy but have a solid history of paying dividends from a stable earnings base.

Exchange Traded Funds (ETFs)

Instead of investing in individual shares, some people prefer ETFs, which are managed funds directly traded on the ASX.
Traditional ETFs track the share market index and can be an effective way to diversify your investments and provide low-cost exposure. With their rise in popularity in recent years, there is now a large range of EFT options available with some specifically designed to generate income.

High Yield Managed Funds

If you are looking for affordable exposure and diversification to a range of incoming generating assets a managed fund is worth considering.
Their ability to be tailored to a different risk and return balance means that you can diversify across asset types, industries and countries, according to your risk profile.
You will be charged a management fee for this level of professional expertise in managing your investment. Look for a provider offering value and consider what impact the fee will have on your potential returns.

Bonds

Bonds have the benefit of providing a reliable income. Government bonds can be attractive because you can invest with a small amount directly on the ASX like you would shares. Where other types of bonds are harder for individuals to be able to access.
Corporate bonds are another option available to you. Where a company makes interest payments to you in return for you indirectly lending them money. While they are safer than some other investments, they come with a lower yield and you run the risk that you may not always get your money back.

Peer-to-peer lending

This is a modern income-producing investment choice that allows you to lend money to a borrower through a third-party lending site. Borrowers pay back an agreed interest rate within a set time frame.
The rate of return is higher than with a savings accounts, but the risk is higher too. With the chance a borrower could default on the loan.

Growing your income as you approach retirement

With several options to choose from to increase your investment income, your risk profile and how close you are to retirement should be considered when looking at these options.

Approaching retirement, some investments in cash could be a wise choice particularly as it comes with the Government Guarantee. If you are investing in cash be sure to shop around for the best deal.

Are you investing for income? If you’d like some help to build your portfolio, chat to one of our own investment experts today.

Disclaimer to Clients: This general advice has been prepared without taking into account your particular objectives, financial situation or needs; before acting on this advice, you should consider whether it is appropriate to you, in light of your objectives, financial situation or needs.