28 April 2012

Many retirees have been riding out the share market doldrums by holding large positions in cash. While the cash rate has been above 4%, term deposit rates have been over 5% and, until recent months, occasionally higher than 6%. These days are coming to an end with the Reserve Bank almost certain to cut its official rate to 4.0% on Tuesday and forecasts of more reductions to follow in the coming months. Even the more conservative economists expect the cash rate to be 3.75% by mid-year with some expecting a rate of 3.25% by December.

Westpac’s chief economist, Bill Evans, was one of the few economists to pick the change in direction by the Reserve Bank last year. He is currently expecting rates to fall to 3.75% with the risks to that forecast being for even lower rates. He outlines his reasons in this article from Business Spectator.

With rates at these levels, it will be harder for retirees to earn sufficient income from their investment portfolio if they persist with large holdings of cash. We strongly recommend the benefits of a balanced portfolio comprising cash, income securities and equities to boost earnings while controlling excessive risk through diversification.