The greatest risk to long-term investors today

Lurking just under the surface of the investment ocean is a risk waiting to devour desperate retirees. The danger – chasing yield.

Yield simply means income generated on an investment over a particular period. It includes the interest earned or dividends received from holding various securities. Considering our current economic situation generating income is tough. With Australian Government 10-year Bonds offering around 2.2%, and the big 4 banks offering 12-month term deposit rates between 0.6 to 0.7% you can see why. On the other hand, income can be generated by dividends from holding shares. Many self-directed retirees concentrate their whole strategy around holding blue-chip shares and living off the dividends. Unfortunately, with COVID-19 decimating the earning of many of these companies, dividends are also reducing as companies hold onto capital. A stark example of this was highlighted with NAB reducing their recent dividends by 51%. So, what is a desperate retiree to do?Generally, what we have witnessed over the years is the race to chase higher yield, is where the sharks start to circle. Economic theory proves the fact that to increase yield you must take on more risk. The danger to people on this journey is they look at the promised returns without understanding the inherent risk they are taking. Unfortunately, this risk can be specific and catastrophic to a retiree’s capital. Just think back to the GFC which was largely caused by investment instruments called ‘Collateralized Debt Obligations’ which held risky mortgage-based loans packaged up into products offering above-market returns.

In Australia, over this past year, we started to see advertisements in major newspapers for investors to place their capital into an investment called Mayfair 101/Mayfair Platinum. The advertising offered significantly higher 12 to 24-month term returns than that available in the bond market. The company raised $67 million from mostly Mum and Dad investors. The underlying investments securing these returns, which I would suggest most investors did not understand, was property based in Mission Beach and Dunk Island located in Queensland, Australia. Today the company is in provisional liquidation after ASIC obtained interim orders from the Federal Court against the companies many entities. While these proceedings are still ongoing there is a high chance many investors will not get all of their money back.

Lastly in the category of if it sounds too good to be true…. This week on Facebook I received a post from a Queensland based organisation promoting directly to self-managed super fund members, offering returns of up to 3% ‘per month’ using their strategies.

History is littered with stories of people leaving well thought out, broadly diversified, high quality, safe investments in the pursuit of higher returns, and in the process destroying their wealth. Our advice is don’t be one of them.

So how does Alman Partners keep our clients out of harm’s way in challenging times like these? Firstly, we ensure our clients have an appropriate asset allocation for their risk profile, investment time horizon and goals. We ensure that the underlying investments are extremely well-diversified and the quality of the investments are secure. For our retiree clients, our bucketing strategy covers income requirements for 3–5 years. Once that is all in place our ongoing focus is to monitor our client’s capital against their plan, make adjustments where necessary and ensure they don’t make wealth-destroying decisions.

Stephen Lowry (CFP® Professional, DFP, AIF®) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.

Note: This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

 

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