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Active Retirees : Active Retirees June-July 2012
Active RetireesTM | 43 in retirees’ portfolios; bonds usually zig when the stockmarket zags. But despite the defensive appeal of the asset class, compared to international investors Australians own few bonds, with the local investment culture geared towards shares and cash, and fixed income, particularly bonds, considered an institutional-type investment. “If you compare Australian super funds to their peers, we are most certainly underweighted in fixed income,” says Gordon. “Access has historically been relatively poor, but it’s only going to get easier as more investors understand fixed interest investments and their value.” When the GFC shattered investors’ belief in equities, many advisers urged Australians to boost their fixed income holdings. Many retirees had already done that, investing in term deposits – the Federal Government had guaranteed them and they were providing attractive yields. But with interest rates falling, yields on term deposits are also declining. Twelve months ago term deposit rates of up to 7 per cent were readily available, but as of March the highest 12-month term deposit rate available, according to comparison site InfoChoice, is with CUA at just 5.85 per cent. The safest fixed income assets are Australian Government bonds – one of the few remaining AAA-rated bonds. But this safety has a downside: yields are historically low due to their safe- haven status and strong demand from international investors. The average yield of a ten-year Commonwealth bond in 2010-11 was 5.33 per cent, while one released in February of this year yielded a modest 3.81 per cent. In this environment, corporate bonds, issued by Australian companies such as Telstra, have become extremely attractive for retirees. Assuming the corporate bonds are held to maturity, a total return around the seven per cent mark can be achieved, against 5.5 per cent to six per cent, at best, for term deposits. Smaller investments Corporate bonds have traditionally been the preserve of the big end of town and investment funds; in the past, investors needed $500,000 to buy a bond. For the average investor or retiree, that meant too much exposure to a single bond and a lack of portfolio diversification. Recently, however, brokers such as FIIG have broken down bonds into » how Much to inVest Once they have decided on an appropriate fixed income asset, a major consideration for retirees is how much of their portfolio to allocate to fixed income. There is no set answer. “It depends on your age, your risk profile and your income needs,” Financial Planner Andrew Heaven says. “One thing I will say is that for retirees the focus shifts from capital growth to capital protection and therefore bonds and fixed interest investments can play a vital role in a retiree’s portfolio.” FIIG’s Gordon agrees that the percentage of assets in fixed income should be determined on a case-by-case basis. “But a general rule of thumb is the percentage of fixed income asset allocation in a portfolio should be equal to your age,” he said. “Once you are in retirement phase it is nearly impos- sible to replace capital that is lost (in risk assets) so that percentage may be even higher.” Access has historically been relatively poor, but it’s only going to get easier as more investors understand fixed interest investments and their value.
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