Tag Archives: Investments

MARKET UPDATE – MARKET AND ECONOMIC OVERVIEW

By Robert Wright /November 23,2016/

Australia

• The Reserve Bank of Australia (RBA) Board met on 1 November 2016, as widely expected, the cash rate was held unchanged at 1.5%.
• The statement remained largely similar to the October statement, with inflation still described as “quite low” and “…expected to remain low for some time”.
• The RBA did however, tilt slightly dovish on the commentary around the labour market, noting that “employment growth overall has slowed”. This was slightly tempered by the observation that “forward-looking indicators point to continued expansion in employment in the near term”.
• Q3 2016 Consumer Price Inflation (CPI) data was released and was slightly above consensus estimates. Headline CPI rose 0.7% per quarter and 1.3% per year, from 1.0% per year in Q2. Key drivers included increases in fruit (+19.5% per quarter), vegetables (+5.9% per quarter) and electricity (+5.4 per quarter) prices, this was partly offset by falls in telecommunication equipment and services (-2.5% per quarter) and fuel (-2.9%.qtr).
• Underlying inflation, the RBA’s preferred measure rose to 0.4% per quarter, slightly down from 0.5% per quarter in Q2 2016. The annualised rate fell slightly to 1.5% per year from 1.6% per year. Both measures of inflation are still below the RBA’s 2-3% target band.
• The September labour market report showed the unemployment rate decreased by 0.1% to 5.6%, driven by a 0.2% fall in the participation rate to 64.5%. The number of people employed fell by 9.8k below the +15k expected. The decrease was entirely driven by full time employment (-53k) while part time employment rose (+46k), continuing the recent trend towards flexible and part-time employment.
• Consumer confidence increased over the month with the index up 1.1% to 102.4. The largest gains were seen in the Economy 1 year ahead (+5.8%) and consumer sentiment (+1.1%) components.

United States

• The US Federal Open Market Committee (FOMC) met on 1-2 November 2016 and as widely expected, left the official Fed Funds target rate unchanged at 0.25%-0.5%. While the November meeting was never considered “live” given its proximity to the US Presidential Election, we and the markets continue to expect a rate increase at the 13-14 December FOMC meeting.
• In detailing the policy decision, the Fed statement was little changed from that released at the time of the September FOMC – with the Fed continuing to signal that a rate hike at the 14 December FOMC is the base case.
• The Fed’s statement repeated the view that “near-term risks to the economic outlook appear roughly balanced” and that they will continue “to closely monitor inflation indicators and global economic and financial developments”. Given this, the Fed noted that “the Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being to wait for some further evidence of continued progress towards its objectives”.
• On inflation, the Fed upgraded their commentary a little, stating that inflation “has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports” and that “market-based measures of inflation compensation have moved up but remain low”.
• The first estimate of Q3 2016 GDP was released at 2.9% on a seasonally-adjusted-annualised-rate, better than the 2.6% expected and an improvement on 1.4% in Q2 2016. The better than expected print was helped by a recovery in net exports and an increase in soy bean exports which contributed 0.9% to the headline figure.
• Growth in Q3 saw a slowing in domestic demand with consumption (+2.1%, down from 2.7% in Q2), business capital spending (+1.1%) and government spending (+0.5%) all weak or slowing.
• Employment was slightly weaker than expected in September increasing by 156K, but still more than enough to cover the estimated natural increase in the labour force. Despite this, the unemployment rate increased to 5.0%, from 4.9% driven by a 0.1% increase in the participation rate to 62.9%.
• Inflation has picked up slightly. Headline CPI was up 0.3% in September, with the annual rate increasing to 1.5% per year. Core CPI increased 0.1% with the annual rate falling 0.1% to 2.2% per year. Inflation continues to be driven by shelter and medical costs, with energy (+2.9% per month) also contributing to the increase in headline CPI.
• The Fed’s preferred measure of underlying inflation, the Core Personal Consumption Expenditure, was stable at 1.7% per year in September, around the level is has remained for most of 2016.

Europe

• The European Central Bank (ECB) met on 20 October 2016 and left monetary policy unchanged, as largely expected.
• ECB president Draghi dampened expectations that asset purchases would be tapered and reiterated the forward guidance that QE would continue at the monthly pace of EUR80bn until there was a sustained increase in the path of inflation consistent with the ECB’s objective.
• The market is expecting an extension of the ECB’s QE program which is due to end in March 2017 at the December meeting.
• The first estimates of CPI for the euro area in October showed an increase of 0.5% per year, the fastest since 2014. Core CPI was stable at 0.8% per year still well below the ECB’s 2% target. Inflation was aided by the increase in oil prices over the last year with energy prices down -0.9% per year in October compared to -3% per year in September. Services remain the main driver of inflation at +1.1% per year.
• The political deadlock in Spain ended over the month with Mariano Rajoy of the centre right Peoples Party sworn in a PM after winning a confidence vote, ending a 10 month period with no government.

United Kingdom

• The Bank of England (BoE) Monetary Policy Committee did not meet in October; the next meeting is scheduled for 3 November 2016.
• Over the month it was confirmed that the BoE governor Mark Carney would leave his role in 2019, before the end of the full 8 year term (2021), but long enough to see the UK through the Brexit. The decision appears to be due to personal/family reasons and not political pressure as speculated.
• Q3 2016 GDP was better than expected increasing by 0.5% per quarter with no sign yet of a “Brexit” slowdown. The annual rate increased to 2.3% per year. Growth was entirely driven by service (+0.8% per quarter), while industrial production (-0.4% per quarter) and construction (-1.4% per quarter) slowed.
• CPI data showed inflation increased by 0.2% in September, driven in part by rising oil and core goods inflation. The annual rate of inflation increased to 1.0% per year from 0.6% per year while core inflation increased to 1.5% per year from 1.3% per year. Rising oil prices and a lower currency are expected to continue driving inflation higher over the next year.

New Zealand

• The Reserve Bank of New Zealand did not meet over October; the next meeting will be held on 10 November 2016.
• Q3 2016 CPI was stronger than expected at 0.2% per quarter and 0.2% per year, down from 0.4% per year in Q2 2016 and still well below the RBNZ’s target of 1-3% on average over the medium term.

Canada

• The Bank of Canada left rates unchanged at 0.5% at their 20 October 2016 meeting.
• September CPI increased by 0.1% while the annual rate rose to 1.3% per year from 1.1% per year. Core inflation was stable at 1.8% per year.

Japan

• The Bank of Japan’s met on 1 November 2016 and left monetary policy unchanged as widely expected.

China

• The People’s Bank of China left monetary policy unchanged during the month with no rate cuts or reserve requirement ratio easing.
• Q3 2016 GDP released in October showed growth once again stable at 6.7% per year, the middle of the 6.5%-7% target band where it has remained for all of 2016.
• Inflation increased in September for the first time since February, rising to 1.9% per year from 1.3% per year in August. Food price inflation continues to be the major driver of inflation, rising to 3.2% per year in September from 1.3% per year in August.
• Chinese producer prices as measured by the PPI increase 0.1% per year in September, the first increase since 2012 and up from -5.9% per year one year ago.

 

AUSTRALIAN DOLLAR

The Australian dollar (AUD) strengthened against most major currencies over October. The AUD was down 0.7% against the USD to $US0.7608, but rose against the euro (+1.85%), the sterling (+5.42%), yen (+2.90%) and NZ dollar (+1.18%).

Improving commodity prices and terms of trade over the month supported the currency.

 

COMMODITIES

Commodity prices were mixed over October with metals varied and weakness in energy, except coal which saw significant increases.

The price of West Texas Intermediate Crude finished the month at $US46.86 per barrel down 2.9%, while the price of Brent was down 4.2% to $US48.61 per barrel. Oil prices rose early in the month, around optimism that a potential OPEC deal would reduce excess supply. Before falling in the last week of October as the market realised any production cuts would be difficult to achieve and would likely exclude key OPEC producers (Iran, Iraq, Nigeria and Libya).

Increasing activity in the US energy sector also weighed on markets with US rig counts now up nearly 40% from the lows reached in May this year.

Gas prices were mixed with the US Henry Hub spot price down 7.9% to $US2.79/MMBtu while the UK natural gas price was up 18.5% over August.

Iron ore prices were stronger over October, up 15.3% to $64.38/metric tonne, as measured by the benchmark price of iron ore delivered to Qingdao China, the highest level is May 2015.

Coal was the best performing commodity over the month with increasing demand from China, due to domestic mine closures, pushing prices higher. The price of Newcastle thermal coal increased 50.4% to $108.6 per metric tonne over the month.

Zinc (+3.4%) and Aluminium (+3.6%) rose over October while Nickel (-0.9%), Lead (-2.8%), Gold (-3.3%) and Copper (-0.2%) were all weaker.

 

AUSTRALIAN SHARES

The ASX/S&P 200 Accumulation Index lost 2.2% during October, with most industry sectors finishing the month lower. Health Care (-8.3%) was among the worst performers, dragged lower by industry heavyweight CSL.

Bond proxy sectors continued September’s decline, as the market reacted to rising bond yields and a potential rise in US interest rates. AREITs (-7.9%) and Utilities (-3.0%) once again underperformed the broader market.

Energy (-2.3%) started the month strongly, but finished lower as doubts surfaced around OPEC’s commitment to cut production. Whitehaven Coal had another strong month on the back of rising coal prices, adding to the 333% share price appreciation since the start of 2016.

Materials (1.3%) outperformed the market with strong performances from Fortescue Metals and Rio Tinto, which benefitted from a strengthening iron ore price.

Financials (0.7%) edged higher, led by banks as sentiment towards the sector improved. Banking stocks typically enjoy investor interest during October, as three of the big four banks go ex-dividend in the first half of November.

 

LISTED PROPERTY

The S&P ASX 200 A-REIT index continued its recent decline, falling by -7.9% in October. Higher bond yields dampened sentiment towards REITs and other income-oriented investments.

Office A-REITs held up relatively well on the view that robust leasing demand from the financial services, legal and technology sectors would support Sydney and Melbourne’s office markets.

The best performing A-REITs were Charter Hall Retail REIT (-1.9%), which stabilised following steep declines in August; and Dexus Property Group (-2.3%), which held an investor day and provided a first quarter update.

The worst performing A-REITs were Iron Mountain (-12.1%) and Scentre Group (-10.4%). Although neither company announced material news, broader sector underperformance weighed on both stocks.

Listed property markets offshore also dipped in October.  The FTSE EPRA/NAREIT Developed Index (TR) fell by -5.7% in US dollar terms. Despite ending the month lower, Hong Kong (-1.3%) was the best performing region for a third consecutive month, followed by Japan (-1.4%).  Property securities in Continental Europe and the UK lagged.

 

GLOBAL SHARES

Global share markets were mixed over October with weakness in the US and strength in Japan and European peripheries. Volatility continued over the month as markets reacted to changes in the oil price, political concerns in the US and the prospect of a Fed rate hike in December.

The MSCI World Index was down 2.0% in US dollar terms in the month of October and -1.3% in Australian dollar terms.

In the US, the S&P500 (-1.9%), the Dow Jones (-0.9%) and the NASDAQ (-2.3%) were all weaker, driven by broad market weakness. While earnings largely beat (reduced) expectations, the results were more “less bad” than good.

US markets also stumbled at the end of the month as it was revealed the FBI had found more Clinton emails in a separate investigation.

On a sector basis, MSCI Financials (+2.13%) was the best performer, as bank stocks climbed with rising yields. MSCI Health Care (-6.94%) was the worst performer as political noise around drug pricing and earnings concerns of medical device companies carried over to the rest of the sector.

Share markets in Europe were stronger over the month. The large cap Stoxx 50 Index rose 1.8% driven by strong performance in the periphery, with Greece (+4.5%), Italy (+4.4%) and Spain (+4.1%) all stronger. Elsewhere the UK FTSE100 (+0.8%), France (+1.4%) and the German DAX (+1.5%) all rose.

Asia markets were mixed with the Japanese Nikkei 225 (+5.9%) and Taiwan (+1.3%) up while Singapore (-1.9%) and Honk Kong’s Hang Seng (-1.6%) fell.

 

GLOBAL EMERGING MARKETS

Emerging market shares were almost flat over October in USD terms with the MSCI Emerging Market Index up 0.2%, outperforming DM equities.

Despite the 3% rally in USD index and higher US yields emerging markets performed well in local currency terms aided by the pick-up in key commodity prices.

MSCI EM Latin America was the best performing region over the month rising 9.72% in USD terms with a strong rebound in Brazil (+11.2%) driven by positive political developments.

MSCI EM Europe, Middle East and Africa (-0.28%) and MSCI EM Asia (-1.54%) underperformed.

The Shanghai Composite Index was stronger, up 3.2% on stable Chinese growth and stronger domestic consumption.

 

Source: Colonial First State.

US Election: Outcome and Implications

By Robert Wright /November 23,2016/

For the second time in 2016, the global geo-political landscape has shifted dramatically with the election of Donald Trump as the 45th President of the United States.

The victory by Donald Trump looks to have been much more comfortable than almost any commentator was expecting – and indeed the election has seen a much stronger vote for the Republican Party than even the Republican Party itself expected.

Words being used to describe the result are ‘tectonic’, ‘revolutionary’ and a significant vote against the political status quo. The implications are likely to be far reaching – in both a political and economic sense.

Donald Trump’s policy priorities are expected to be:

• Tax reform: including a substantial reduction in both income tax (down to three basic rates, 12%, 25% and 33%) and cuts in the company tax rate to around 20%-25% (from 35% currently).
• Healthcare reform: Repealing Obamacare with a focus on reducing costs and entitlements.
• Defence: Increased spending on both Defence ($US450bn) and Veteran’s programs ($US500bn).
• Trade policy: A much more aggressive trade policy, including naming China as a currency manipulator and imposing tariffs on selected Chinese imports, changing the terms and conditions and NAFTA and abandoning the Trans Pacific Partnership (TPP). We would note, however, that there is considerable uncertainty of whether Trump as President could act unilaterally on trade policy, or whether he would need the support of Congress (which may not be forthcoming) to change policy, especially treaties such as NAFTA.
• Immigration reforms: Reduce the flow of both legal and undocumented immigrants, including some deportation efforts and much tougher rhetoric.
• Infrastructure: An infrastructure spending program of approx. $US300bn over coming years.
• Other: Housing finance reforms, loosening M&A regulations, loosening media ownership and liberalizing energy drilling requirements, reversal of some climate change policies.

 

Implications of President Trump policies

It is our view that, over time, Donald Trump’s policies would, as announced, be highly stimulatory, expansionary and, ultimately, inflationary.

In terms of implications for financial markets we see three phases for the period ahead – but with less confidence on the exact timing of these trends.

1. The initial market reaction, globally, was ‘risk off’. Global equities were down, the USD was down against other major currencies and US Treasury bond yields were down. This is a very similar reaction to that seen after the ‘Brexit’ vote.

At one stage in the US (late afternoon on 9th November AEST), the S&P and NASDAQ Futures were down 5%, the maximum drop permitted by the Chicago Mercantile Exchange before trading curbs are triggered. Globally, the Japanese Nikkei closed down -5.4%, Hong Kong’s Hang Seng -2.2% and the ASX200 down 1.9%. However, once US markets opened, the ‘risk off’ sentiment quickly reversed with most equity markets closing higher.

In bond markets, much like equity markets, we saw the initial ‘risk off’ sentiment quickly reverse as US markets opened and yields rose sharply on the result, with US 10yr yields up 20bps to 2.07%. Initially Australian 10yr bonds were down 14bp to 2.21%, but in overnight futures trading yields have increased 29bps to 2.49%.

The ‘risk off’ mode was based on the view that Donald Trump is a vote for significant change in the US political system. This change will likely bring uncertainty and, as we know, markets do not like uncertainty. However it is fair to say that phase one has been shorter than expected.

2. The second phase of the market reaction, which appears to have begun sooner than we anticipated, is likely to be ‘risk on’, with positive sentiment towards equities and weakness in bonds. This is based on the view, as already mentioned, that Donald Trump’s policies are very stimulatory, expansionary and inflationary.

If he was able to get his election policies through Congress (which could be more likely given the Republican’s majority in both the House and Senate), we are likely to see a near-term acceleration in the pace of growth of the US economy and a surge higher in the USD.

The equity markets could potentially respond positively to this stimulus – especially those with significant cash holdings off-shore and those companies involved in sectors of the US domestic economy that stand to benefit from Trump’s nationalistic policy focus.

3. Phase three of response to President Trump’s policies are, not likely to be as supportive. The key issue here, in our view, is that the inflationary implications of Trump’s policies are likely to see the Federal Reserve raise interest rates much more aggressively than currently priced into markets as inflation takes hold.

This could be expected to see Treasury bond yields move sharply higher – short-circuiting the stronger economic data. Trumps anti-trade policies and commitment to increasing tariffs are also likely to be inflationary and negatives for growth. The implication here is that, perhaps within a year or so of President Trump’s policies being introduced, the US economy could weaken significantly (possibly head towards recession), with the USD, bond yields and the equity markets all likely to decline as well.

 

Source: Colonial First State Investments

The Australian housing market – surging unit supply, the economy and what it all means for investors

By Robert Wright /November 23,2016/

Housing matters a lot in Australia. Having a house on a quarter acre block is part of the “Aussie dream”. Housing is a popular investment destination. And the housing cycle is a key component of the economic cycle and closely connected to interest rate movements. But in the last 15 years or so it has taken on a darker side as a surge in house prices that started in the late 1990s has led to poor affordability and gone hand in hand with surging household debt.

Reflecting this, predictions of an imminent property crash bringing down the Australian economy have been repeated ad nauseam since 2003. This note looks at the risks of a property crash, particularly given the rising supply of units, implications from the property cycle for economic growth and how investors should view it.

High house prices and high debt

The big picture view on Australian residential property is well known. First, Australian housing is expensive. According to the 2016 Demographia Housing Affordability Survey the median multiple of house prices in cities over 1 million people to household income is 6.4 times in Australia versus 3.7 in the US and 4.6 in the UK. In Sydney it’s 12.2 times and in Melbourne it’s 9.7 times. The ratios of house price to incomes & rents are at the high end of OECD countries and have been since 2003.

Second, the surge in home prices has gone hand in hand with a surge in household debt, which has taken Australia’s household debt to income ratio from the low end of OECD countries 25 years ago to now around the top.

How did it come to this?

While it’s common to look for scapegoats to blame for high home prices and debt, the basic driver looks to be a combination of the shift from high to low interest rates over the last 20-30 years which has boosted borrowing and buying power and the inadequacy of a supply response (thanks to tight development controls, restrictive land release and lagging infrastructure) to suppress the resultant rise in the ratio of prices to incomes.

A home price crash remains unlikely

The surge in prices and debt has led many to conclude a crash is imminent. But we have heard that lots of times over the last 10-15 years. Several considerations suggest a crash is unlikely.

• First, we have not seen a generalised oversupply and at the current rate we won’t go into oversupply until around 2017-18.
• Second, despite talk of mortgage stress the reality is that debt interest payments relative to income are around 2004 levels.
• Third, Australia has still not seen anything like the deterioration in lending standards seen in other countries prior to the GFC. In fact in recent years there has been a decline in low-doc loans and a reduction in loans with high loan to valuation ratios.
• Finally, it is dangerous to generalise. While property prices have surged 60% and 40% over the last four years in Sydney and Melbourne, they have fallen in Perth to 2007 levels and have seen only moderate growth in the other capital cities.

The risks on the unit supply front are a concern

To see a property crash – say a 20% plus average price fall – we probably need to see one or more of the following:

• A recession – much higher unemployment could clearly cause debt servicing problems. This looks unlikely though.
• A surge in interest rates – but rate hikes are unlikely until 2018 and the RBA knows households are more sensitive to higher rates so it’s very unlikely rates will reach past highs.
• Property oversupply – as noted above this would require the current construction boom to continue for several years.

However, the risks on the supply front are clearly rising in relation to apartments where approvals to build more apartments are running at more than double normal levels.

Due to the rising supply of units, vacancy rates are trending up & rents are stalling, making property investment less attractive.

Outlook

Nationwide price falls are unlikely until the RBA starts to raise interest rates again and this is unlikely before 2018 at which point we are likely to see a 5% or so pullback in property prices as was seen in the 2009 & 2011 down cycles. Anything worse would likely require much higher interest rates, or recession, both of which are unlikely. However, it’s dangerous to generalise:

• Sydney and Melbourne having seen the biggest gains are more at risk and so could fall 5-10% around 2018.
• Price growth is likely to remain negative in Perth and Darwin as the mining boom continues to unwind but this should start to abate next year.
• The other capitals are likely to see continued moderate growth and a less severe down cycle in or around 2018.
• Units are at much greater risk given surging supply and this could see unit prices in parts of Sydney and Melbourne fall by 15-20% as investor interest fades as rents fall.

The property cycle and the economy

Slowing momentum in building approvals points to a slowdown in the dwelling construction cycle ahead. While this might be delayed into 2017, as the huge pipeline of work yet to be done is worked through, slowing dwelling investment combined with a slowing wealth affect from rising home prices mean that contribution to growth from the housing sector is likely to slow. However, as this is likely to coincide with a fading in the detraction from growth due to falling mining investment and commodity prices it’s unlikely to drive a slowing in the economy.

However, a likely decline in rents (as the supply of units hits) will constrain inflation helping keep interest rates low for longer.

Implications for investors

There are several implications for investors:

• Firstly, over the very long term residential property adjusted for costs has provided a similar return to Australian shares. Its low correlation with shares, lower volatility but lower liquidity makes it a good portfolio diversifier with shares. So there is clearly a role for property in investors’ portfolios.
• Secondly, there remains a case to be cautious regarding housing as an investment destination for now. It is expensive on all metrics and offers very low income (rental) yields compared to other growth assets. This means a housing investor is more dependent on capital growth.
• Thirdly, these comments relate to housing in aggregate and right now it’s dangerous to generalise. Apartments in parts of Sydney & Melbourne are probably least attractive but for those who want to look around there are pockets of value.
• Finally, investors need to allow for the fact that they likely already have a high exposure to Australian housing. As a share of household wealth it’s nearly 60%. Once allowance is made for exposure via Australian shares it’s even higher.

 

Source: AMP

Five ways to create a reliable income in retirement

By Robert Wright /June 28,2016/

With interest rates at record lows and little chance of a change in sight, creating a reliable income in retirement can be challenging.

With the cash rate at just 2% since June 2015, Australian interest rates are lower than ever before. And according to the Commonwealth Bank economics team, there’s little prospect of rates lifting before the end of 2016.

That’s a problem for investors looking for a secure and reliable income in retirement, without putting their money at risk.

The good news is that there are alternatives. Here are five options to consider, with some of the pros and cons of each.

Option 1. Account based pension

An account based pension is a superannuation account that pays a regular income, with the freedom to choose your own investment strategy.

Pros. You can choose between investment options and set your own pension payment amount (within government rules). You can also adjust your pension payment in response to your changing needs and your account’s investment performance. You can even make lump sum withdrawals when you need them (a limit may apply). And if you’re 60 or over, you usually won’t have to pay any tax on your pension payments.

Cons. Your income isn’t guaranteed — so if your investments don’t perform, you could earn less than you’d planned.

Option 2. Annuity

Available from insurance companies and superannuation funds, annuities give you a fixed, regular income for a set period of time or the rest of your life, depending on the product that you chose.

Pros. You enjoy the security of a pre-defined income, no matter how markets perform. And you generally won’t need to pay tax on your annuity income after you turn 60.

Cons. You don’t have the flexibility to withdraw a lump sum if you need extra cash, and you won’t get to choose where your money is invested.

Option 3. Bonds

A bond works a little bit like a loan. When you buy a bond, you are effectively lending money to the issuer — usually a government or a company. In return, they generally pay you a regular income until the bond matures, at either a fixed or a floating rate. When the bond matures, you get a payout at the bond’s face value.

Pros. Depending on the investment you choose, a bond can offer a higher level of income than cash, with less risk than alternatives like shares or property.

Cons. In Australia, most bonds can be difficult for individual investors to access, which is why many investors choose to invest through a managed fund or super fund. And bonds are not risk free, particularly higher-yielding company bonds.

Option 4. High yield shares

As at 27 October 2015, CommSec data showed that 21 of Australia’s largest companies offered dividend yields of 5% or more, covering sectors as diverse as banking, resources, infrastructure, telecommunications and more. For those looking to earn an income, recent market falls could offer the opportunity to pick up high-yielding stocks at lower prices.

Pros. Carefully selected shares can offer comparatively high levels of income, with the added bonus of franking credits — which are like a tax credit for tax the company has already paid on your behalf.

Cons. Unfortunately, higher returns tend to involve higher risk, and shares tend to be more volatile than other investment options. And while a regular dividend income can help to offset the impact of any future share price falls, there is also no guarantee that a company will continue to pay dividends at the same rate.

Option 5. Property

Residential property is a very popular choice for those looking for a secure, income-generating asset.

Pros. Property offers the potential for rental income today and capital gains in the future. And a buoyant housing market has made property a rewarding investment for many.

Cons. Rising property values have driven rental yields to record lows in many parts of Australia, with the national average yield falling to just 3.3% in August 2015, according to the CoreLogic RP Data Home Value Index. Remember too that house prices can and do fall, especially after a period of strong gains.

Getting the balance right

Not sure which option to choose? The good news is that you don’t have stick to just one. A financial adviser can help you build a portfolio of investments both inside and outside super, with the right mix for your individual income needs and preferred level of risk. That could help you avoid the greatest risk of all — running out of money in retirement.

 

Source: Colonial