Q. I am considering reallocating my super investment funds with an increase in fixed interest. At present, the allocation is 25% diversified fixed interest, 25% Australian fixed interest and 50% cash, with an average return of about 7.8% over 2010-11. Changing the mix to an even 33% would yield a return of about 9.2%, if current earnings rates were maintained in the year ahead. That assumes continuing debt, gloom and recession, with no sudden sustained surge in equities on the horizon. Do you agree? What would you advise please? (I am near retirement age.)
A. Your question highlights the dangers of making investment decisions based on past performance. Many investors would have been pleasantly surprised by the performance of their fixed interest funds in the past 12 months. Some funds have performed at 11% in a global climate of falling share prices and rate cuts on cash deposits.
Fixed interest funds invest in Corporate and Government Bonds, Debentures and money markets. They are not Term Deposits and as such are subject to capital volatility. You already have 50% of your portfolio exposed to Fixed interest markets and 50% invested in cash. Whilst it is tempting to plough money into Fixed interest based on past performance, consider that the very reason that they have performed has been the cut in Global interest rates and improved outlook in some credit markets. If we have another dose of credit crisis or when rates rise (as they will at some stage into the future), those holding fixed interest bonds will find they suffer capital losses as bond holders need to discount the capital value of the bonds they hold to compete with rising interest rates or get out for fear of default. The very opposite effect of what has just happened. The horse has bolted on bonds unless you feel that yields will continue to fall. Given the level of global interest rates right now, this would appear highly unlikely.
Investment decisions need to be made on the basis of your personal circumstances, your time frame and where we are in the investment cycle. Having all your eggs in the one basket exposes you to greater volatility and risk. If you don’t believe you can lose money in Fixed Interest check in with anyone who held fixed interest funds in 2007 and 2008.