Most working Australians have had an interesting time of it lately. The Reserve Bank of Australia (RBA) recently noted that we’re experiencing the biggest economic shock since the 1930s, with unemployment expected to hit 10% later this year.1 In times like these it’s natural that people should be feeling cautious.
Many finance experts would suggest you have a rainy-day fund – perhaps six months’ worth of income readily available for emergencies. But it’s also important to keep the long term in mind. If you can afford to think more strategically about the long term, what are your investment options in this current environment? If you’ve got a secure income, or cash from a recent home sale, tax refund or inheritance, investing in your super could be a smart choice.
Cash, property or super?
In the past, many people would have turned to two Australian investing stalwarts– cash and property. They’re both looking less attractive as an investment now. Here’s why.
Interest rates are at historic lows, after being on a downhill slope for the past decade. In September, the RBA said “…It will not increase the cash rate target until progress is being made towards full employment.” The RBA’s current cash rate target is 0.25%2 and you can search high and low for high interest savings accounts and get not much more than 1% for your money – and that’s for a very limited time.
With low returns, comes low risk – cash is one of the least volatile investments available. The trade-off is that cash won’t necessarily grow your money at a pace faster than your cost of living.
Bricks and mortar getting pestled
Meanwhile, Australia’s favourite dollar destination – residential property – could face an uncertain future, with at least two big forces pushing down prices and rent.
Unemployment is currently at over 7%3 and likely to get worse. That means fewer people buying new houses and pushing up prices. And more people struggling with their mortgage and selling under pressure – which could push prices down.
Immigration has paused. In June, the Government suggested immigration could fall by 85% this financial year. That’s over 200,0004 less people looking for a home – and a lot less demand for residential property.
We don’t proclaim to have a crystal ball on residential property prices – prices have surprised on the upside before. We know when looking at overseas property markets and pockets within Australia, prices can surprise on the downside too. When the outlook is so uncertain it’s important to understand the full risks of property.
If not there – where?
Where does all this leave you? If you’ve got extra cash, you might consider building up your retirement nest egg through super. You can spread your money across a range of different investment types via a diversified fund or focus on particular asset classes like shares if you’re comfortable with short-term fluctuations.
Why super? One reason is it’s track record. Since compulsory super started coming out of our pay in 1992, the median growth fund has delivered an average return of nearly 8% each year.5 That’s well above inflation and above the target return for those types of funds.
Perhaps the most under-rated reason is that super earnings are tax effective. You may find you pay less tax on your investment earnings in super than in non-super investments (unless you’re on a very low income). That means a higher effective return.
And why a diversified fund? In an uncertain economic climate, it makes sense to invest in a portfolio that can handle a range of different events and trends. A bedrock of MLC’s strategy is to spread funds across traditional asset classes like fixed income, cash, property, and shares, but also to use alternative investment strategies – i.e. hedging, derivatives etc to reduce risk and seek different “types” of return.
Obviously, each person’s investment strategy should be tailored to their exact needs as there are tax and preservation rules you should consider. If you’d like to explore your investment options and whether more super makes sense for you, contact your financial adviser on 0438 334 334 for some more investment insights.
1 Statement by Philip Lowe, Governor: Monetary Policy Decision, 1 September 2020, https://www.rba.gov.au/media-releases/2020/mr-20-20.html
2 Cash rate target, Reserve Bank of Australia, https://www.rba.gov.au/statistics/cash-rate/
3 Key economic indicators snapshot, Reserve Bank of Australia, https://www.rba.gov.au/snapshots/economy-indicators-snapshot/pdf/economy-indicators-snapshot.pdf?v=2020-09-07-09-19-12
4 What an 85pc fall in migration means for the economy and housing, The Australian Financial Review, https://www.afr.com/policy/economy/later-migration-plunge-to-hurt-economy-and-housing-20200501-p54p2g
5 Super Funds Navigate The Crisis To Deliver Surprise Result, Chant West, https://www.chantwest.com.au/resources/super-funds-navigate-crisis-to-deliver-surprise
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