Say hello to T.I.N.A

Friday, 27 March 2015

Last week whilst attending a fund manager forum I was introduced to TINA. It seems in 2015 with record low interest rates and possibly even more rate cuts on the way many investors have already met TINA! Like you I had never heard of TINA – you see TINA is an acronym for ‘There Is No Alternative’.

It is a nice way of encompassing the despair many investors in fixed term deposits are feeling right now! If term deposits at 3% aren’t paying their way how ugly might things get should they drop as low as 2%. So the conclusion for many fixed interest investors is to think “there is no alternative” I must move my savings or investments someplace else! But where?

The harsh truth is that any move out of cash and fixed interest assets in the search for a better return means you must take more risk with your capital and you must expect more volatility.

Property markets are on the boil again and by every measure look very expensive. Unemployment is trending up and personal debt levels in Australia are near global highs – in the early 1990’s for every dollar in income earned Aussies owed about 40 cents. Today it is an average of $1.50 in debt for every dollar earned.  A nearly four-fold increase, no wonder our populist politicians start agitating for first home buyers to be able to access superannuation for a home deposit……….Mr Hockey if your reading this you don’t put out a fire with petrol!

Share markets are at their highest levels in over 7 years. Some well-known businesses are bordering on expensive with price earnings ratios well into the twenties and thirties. Whilst not yet at these lofty heights even stalwarts like the Commonwealth Bank, are in the words of boutique funds manager IML “priced for perfection”.

So where should a frustrated fixed interest investor turn in these despairing times – our answer is to reflect long and hard on why we hold cash and fixed interest assets in the first place! You see cash and fixed interest assets are not in a diversified portfolio for their stellar returns – only twice in the last century has cash been the best performing asset class. Cash and fixed interest are primarily held in a diversified portfolio to manage risk! Any income earned is a bonus – as Nick likes to say the interest is only the icing on the cake. It goes without saying that if 100% of your portfolio is in cash and fixed interest I hope you like your cake plain and simple. However if you have a well-diversified portfolio you shouldn’t be selling your risk reducing assets now to buy riskier assets at likely elevated prices, just because the icing is a little thinner than a few years ago.

Professional investors and advisers are keen disciples of regular portfolio rebalancing. If you are not familiar with the concept it involves regularly reviewing your portfolio and reducing allocations to those assets that have performed really strongly and increasing allocations to those assets that are underperforming. In 2015 in the present context this likely means not buying more shares and property, but allocating new funds, savings, and income to cash and fixed interest. During the depths and despair of the GFC in 2009 it also meant reducing allocations to cash and fixed interest and buying shares! Sounds a bit unorthodox but when you think about it rationally (filtering out all the media noise and the human emotions of fear and greed) it essentially seeks to buy low and sell high. Some commentators label this approach contrarian – we like to think of it as common sense risk management.

Recently we have had quite a few robust client discussions where the value of retaining cash and fixed interest assets has been questioned? Also being questioned is our apparent inactivity as advisers in dealing with poor returning cash holdings? My hope is that this discussion sheds some light on why I believe we are being “deliberately inactive” to start 2015, and why maintaining or even slightly increasing your cash and fixed interest investments –at this time isn’t so reckless after all!

Regrettably very few investors have the discipline to invest this way. This is particularly the case for the DIY investing crowd. Our thanks to NAB/MLC for putting together the data recently which shows unprecedented large sums of money buying into our share market in 2007 (at the record highs before the GFC) only to be followed by unprecedented selling out in 2008 and 2009 during the GFC lows. Even more disturbingly Australian Banks were taking unprecedented large amounts of new term deposit money at the same time as share markets hit rock bottom and interest rates started to plummet! Of course in 2015 this has all turned around with lots of money now selling out of bank term deposits (when interest rates are at record lows) and buying into shares and property which have enjoyed four years of very healthy returns! Who says history never repeats?

For more information or a discussion on your own situation and needs call us today on 1300 376 781.

About The Author

Richard Brannelly

Richard Brannelly

Senior Financial Planner & Director

Richard Brannelly is one of Australia’s leading financial planners and has for over 15-years been helping busy Australian families get their finances into great shape and genuinely stop worrying about money.

CommonCents Financial Planning work closely with motivated mums and dads, using a proven framework and practical step by step actions, that are guaranteed to have you living life free of financial stress, and with more cash left over for the things you really value.

Richard’s greatest frustration is that despite us living in one of the wealthiest countries in the world, Australian parents today are more worried about money than ever before. He has seen first-hand the issues money worries cause to families, relationships, and ultimately to the health of good people – and has devoted his working life to changing this.

 Since 2001 Richard has met with thousands of Australians from all walks of life – high incomes, low incomes, self-employed, business owners, families with lots of money through to absolutely no money at all – and has coached all of them on the behaviours and knowledge needed to get ahead.

CommonCents Financial Planning was founded solely to deliver the outcomes that families cherish most. Foremost in this thinking is an understanding that most people couldn’t care less about the latest money fad or financial product, what they really want is a trusted partner to help them make the right choices, and live the life they really want.

Together with business partner Nick Girle he runs CommonCents Financial Planning.

Email  or call 1300 376781 today for an appointment and CommonCents Financial Planning will give you the answers you need to worry less about money and achieve the lifestyle you’ve always dreamed of.

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