Interest rates in Australia are currently at record lows. According to Reserve Bank governor Philip Lowe, they are likely to stay that way for several years as the economy recovers from the recession caused by COVID-19 restrictions.
It is important to have appropriate strategies in place to increase your investment returns in a low interest rate environment. Two key strategies include:
- diversification
- investing in international assets.
Diversification
Diversification is a fundamental investment strategy. It means spreading your investments over different asset classes. Or to borrow an old saying, ‘not putting all your eggs in one basket’.
There are three basic asset classes:
- fixed interest
- property
- shares.
History shows that when one asset class is not delivering high returns, one or both of the other asset classes tend to outperform it, because investors move their funds to better-performing investments. However, no one has a crystal ball to accurately predict investment returns, so it makes sense to diversify your investments and have some exposure to each asset class.
Diversification can both reduce your exposure to risk and increase your investment returns. If the investment returns in one asset class are lower, the returns in one or both of the others are likely to be higher (and vice versa).
For example, despite the current low interest rate environment, both the share and property markets are showing signs of rebounding as the economy recovers. Low interest rates and government grants are helping the property market, while business operations (and profits) in most industries are getting somewhat back to normal as restrictions have eased.
It is crucial to understand that investing in any asset class carries a degree of risk. The higher the potential return, the higher the risk (and vice versa). Fixed interest is the lowest-risk investment, followed by property and shares. However, over the long-term, history shows that both the property and share markets deliver higher returns than the fixed interest market.
International investments
Investment markets around the world are currently very volatile. Most countries around the world have been harder hit by COVID-19 than Australia. Investing in assets in these countries is another potential way to increase your investment returns in the low interest rate environment, provided you invest in undervalued assets. Undervalued assets have the most potential to increase in value over time once the initial impact of market shocks has eased.
For example, share markets indices around the world dropped sharply when COVID-19 first hit, but have since largely recovered. Some markets and company share prices have been harder hit than others, and some have recovered more quickly than others.
Investing in international assets can further diversify your investment portfolio. However, it is best to seek independent and professional advice rather than investing based purely on speculation.
How we can help
Our experienced team of financial advisors at Wilson Pateras in Richmond can help you to develop an investment strategy to achieve your financial goals.
Contact us today for a complimentary, obligation-free consultation to find out how we can help you!
