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Investing in a Low Rate Environment

Article By Adam Hurwood | | Financial Planning
“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?

Australian official rates have remained at historically low levels for the past eight years, as you can see from the chart below. Many market observers believe interest rates will remain at very low levels around the world for some time to come.

Official Australian Interest Rate %

Source Reserve Bank of Australia

So should you be adjusting your portfolio to a low rate environment?

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.

However, investors should 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 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.

To discuss the current market please contact your Altitude Adviser.

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