“Lower for longer” has been a common theme running through interest rate markets for the past few years. So how should investors be positioning their portfolios in this environment?
Official interest rates in the US have been at zero for more than nine years now and Australian official rates have remained at historically low levels for the past eight years, as you can see from the chart below.
And many market observers believe interest rates will remain at very low levels around the world for some time to come.
So should you be adjusting your portfolio to a low rate environment?
BT Technical Services Manager Bryan Ashenden cautions against investors making significant changes.
“Provided you already have a well diversified portfolio that is appropriate for your attitude to risk, then your best policy is to stick to your long-term strategy,” he says.
However, Mr Ashenden recommends investors discuss the issue with their financial adviser and asking whether a tilt to certain assets in their portfolio may be appropriate.
For instance, low interest rates mean low return for cash and term deposits so the more conservative or income oriented investors may consider increasing their allocations to fixed interest to increase their income return over the medium term. And for your money that is in cash, make sure it is earning the best rate in the market. That means not being afraid to change banks where necessary.
Low interest rates tend to be supportive of growth assets such as shares and property, as interest expenses often make up a significant portion of costs borne by businesses and investors. So, investors with a longer-term horizon may consider increasing allocations to shares and property to take advantage of higher income and greater potential for long-term capital growth.
In general, the aim of lowering interest rates by banks is to encourage individuals and businesses to invest and spend and therefore increase economic growth. The prospects of growth in an the economy is ultimately what drives sharemarkets. So, if central banks are successful in their attempts to increase spending and investment, it is generally good news for the sharemarket.
But Mr Ashenden cautions that the direction of interest rates rather than their absolute value can have a more significant bearing on growth assets.
“Rising interest rates can have a detrimental effect on shares and property as businesses and investors adjust to higher costs of doing business,” he says.
To ensure your investments are working hard for you during this low interest rate period, please speak to us today.