Economic growth in Australia has been impaired over the past few months. This is due to the ongoing drought, then bushfires and continued wild weather, followed by the outbreak of COVID-19.

The 10-year government bond yield has plummeted to a historic low of 0.60% after COVID-19 was announced. The Australian cash-rate is currently at a record low of 0.50% and we anticipate it to head lower, yet it is still higher than that in most developed economies.

Low-interest rates are the main way to encourage more consumption and so thought to be the way to sustain the economy. They are here to stay. A drop in the cash-rate is not favourable for savings and hence investments. Therefore, the hunt for yield will now be greater than ever before.

So what can be considered to achieve a higher yield in such times?

Undeniably, paying lower fees and maximising tax concessions lead to higher yield.

Fees: Let’s aim for investment fees of 0.50% p.a. or less – a passive investing strategy is one way to do this. Low cost diversified managed funds or exchange-traded funds (ETFs) from highly reputable investment managers are available to meet investment categories from cash, bonds through to shares.

Tax concessions: contributing into superannuation or instead boosting income via franked dividend credits on Australian shares.

So how to invest?

Cashflow management: Planning the timing and amount of money required in the future to ensure the most suitable investments are made as per the requirements recognised, such as short-term monetary needs should be met by low-risk investments like cash and term deposits. The money you will not likely need in the next 3 or 5 years can be invested in riskier assets. But one must be prepared to ride the markets up and down in the short term due to the volatile nature of the market, remembering you are in it for the long run. This means longer-term capital gains discounts are maximised.

Cash and term deposits: research and comparisons should be made to ensure you get your hands onto the best term deposit rates. Additionally, there are guaranteed deposits of up to $250,000 by the Australian government in each Authorised Deposit-taking Institutions such as your bank, building society or credit union. Thus, to take advantage of the guaranteed deposit, it is prudent to have less than or equal to $250,000 with each institution.

Riskier assets: Clearly, higher returns are associated with undertaking greater risk. Thus, there’s a call for more effective risk management, which requires all possibilities of risk to be considered and analysed. Moreover, setting and focusing on a yield objective is of utmost importance. One should not succumb to timing the market (speculating).

Diversification: Selecting stocks to invest tends to be quite a risky and costly process. Hence, low cost diversified managed funds or exchange-traded funds (ETFs) can help you to invest in a large “basket” of different shares or assets and so spread the risk of choosing losers and winners.

Don’t invest in what you don’t understand: If it is too complex to be understood, then avoid the hidden risks.   If it looks too good to be true then it probably is.

Disclaimer: The above is only general financial advice based on the current economic situation and is not tailor-made to one’s specific needs. 

With over 16years global experience in actuarial, superannuation and investment consulting, Neekhil is the Principal Consultant and conduit to clients and the McGing team of analysts.
Neekhil and the team at McGing Advisory & Actuarial provide a wide range of superannuation support services including investment governance and transition, and actuarial advice.