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As investors hasten to switch into equities to chase yield and buy into a rising market, they need to take care that they don’t over-react and make decisions based on short-term aims that have nothing to do with their long-term investment strategy, warns Jonathan Philpot of HLB Mann Judd Sydney.

As investors hasten to switch into equities to chase yield and buy into a rising market, they need to take care that they don’t over-react and make decisions based on short-term aims that have nothing to do with their long-term investment strategy, warns Jonathan Philpot, wealth management partner at HLB Mann Judd Sydney.

“We are seeing more and more investors looking to get out of cash and back into other asset classes, in particular equities.  But there is a danger that investors will simply go from one extreme to another – from mostly term deposits to mostly investing in shares – and forget all about diversification and a balanced portfolio.

“While share market returns have been far greater than term deposit returns over the past 12 months, investors also need to keep in mind that what they have in superannuation and other retirement savings are long-term investment, and they should ensure they look forward with their decisions, not base them on what is happening now or what happened last year.

“Those investors who have a soundly-based investment strategy should already have a diversified portfolio that reflects their risk profile and they should be encouraged to stick to this,” Mr Philpot said.

He said that adjusting a portfolio that is primarily based on cash and term deposits is a good idea, but simply moving from this into 100 percent high yielding shares will sharply increase the risk of capital losses and exposure to volatility.

“Chasing last year’s best performing, or today’s hot asset class, is never a sensible investment strategy.

“With one year term deposit rates likely to fall below the four percent level, it is inevitable that many investors are now moving into higher returning investments but they need to take into account the higher risk.

“Investors still entirely in term deposits have seen a 50 percent drop in income compared with what was received only a few years ago – a fall which is worse than most Australian investors with a portfolio weighted towards shares and property experienced in the global financial crisis.”

Mr Philpot added that the current temptation for investors is to invest solely in the companies that have increased their dividend payouts over the past 18 months and now offer very attractive yields.

“For example, bank dividend yields, plus franking credits, were delivering twice the return that term deposits offered, so it is understandable that investors were buying into these, and the other high yielding shares.

“This is driving up the price of high yielding shares, but these could well drop if the market sees them as over-priced, which will then put capital at risk.

“Investors seeking growth should maintain some exposure to defensive asset classes.  For instance, retirees should keep at least three to four years’ worth of pension payments in cash investments such as term deposits as a buffer against any future downturn.

“They should also keep in mind that the question is not if there will be another downturn, but when.  With this in mind, term deposit interest rates in Australia are still better than almost anywhere else in the world, and also remain attractive against Australian government bond rates, with the 3 year bond rate currently at 2.63%, compared to 3 year term deposit rates at 4.55%.

“Bonds can still make a good investment but I would strongly recommend anyone looking to invest in them to use a bond fund as it is a very technical area, and holding bonds from only one or two issuers can carry risk,” Mr Philpot said.

HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.

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For more information please contact:

Jonathan Philpot – Phone: 02 9020 4196

21 May 2013