INCOME IS KING

While interest rates have been dropping, the Australian share-market has surged, as have US shares and Australian listed property. The ASX returned 11.5% – as measured by the S&P/ASX Total Return Index – in the 2018-19 financial year. But the result wasn’t without twists and turns, with the market down about 10% in the first half of the year and up about 20% in the second half, emphasising the wild ride investors need to be prepared for.

A coalition victory at the May 2019 federal election enhanced the second half rebound. Many investors felt they had dodged a bullet because they had feared the effects of Labor’s proposed sweeping changes to the dividend imputation system, capital gains tax and negative gearing. On the first trading day after the election, the ASX rose 1.7% and the big four banks surged between 6% and 9%.

More recently, on July 30, the Australian sharemarket’s benchmark index hit an all-time high after the S&P/ASX200 broke through the record mark of 6851.5 points, last reached more than 11 years ago. But in the first weeks of the August reporting season, volatility again hit shares, not because of poor returns from local companies but due to external factors, most notably the trade war between the US and China and renewed fears of a possible recession – a timely reminder that as investors we are all hostage to global events. At the time of writing the S&P/ASX200 closed at 6467.4 points.

Consider this: a retired couple want to achieve a comfortable standard of living – $61,522 a year at the end of the June quarter, according to the Association of Superannuation Funds of Australia (ASFA) – by investing in just term deposits and not eating into their capital. They would need $2.6 million at the best longer-term rate of 2.35% (over three months) that Money could find at the time of writing. Not many of us achieve a nest egg of that magnitude.

A single person wanting to live a comfortable life, needing $43,601pa, according to ASFA, and again investing only in term deposits, would need $1.85 million. This is more than the $1.6 million maximum that any individual can have in a pension account, which produces a tax-free income.

If you can improve your returns a little to 4% (around the long-term average income returns from the ASX 200), a couple with a lump sum of $1.43 million (with no access to a pension) can generate an annual income of $60,000 for 25 years, according to superguide.com.au.

And younger people saving for a house deposit or a kitty to start an investment portfolio are also finding little joy in sticking to bank accounts in this low interest rate environment. If you started with $5000 and saved $500 a month at an interest rate of 2.35%, it would take 14 years to save $106,298.

Move to riskier assets

It’s not surprising that investors of all ages have realised they need to move some of their money from the comfort