“Still today, the definition of investment risk remains the volatility of share prices…we refuse to accept volatility as a problem. Our primary risk is not losing money but outliving it.” – Peter Thornhill (Financial Commentator).
This month the RBA reduced cash rates to 1.50% pa. At the height of the GFC cash rates were 7% pa. In 2009 it was remotely possible to think about living on term deposit interest and live happily ever after. Not now. With costs of living rising (e.g. private health insurances up average 5.6%, Brisbane private school fees up 6%, electricity up 8% pa) this trend is unlikely to reverse despite recent talks of deflation (price of goods getting lower).
In assessing investment news headlines it is important to note “prices” represent “half the story.” The other half is income. The chart below highlight the price movements (blue line) of the Australian Stock Exchange (ASX) listed companies since 1992 compared to price movements and dividends (green line):
The key to successful investing is focusing on the green line which is: providing a growing income stream which enables one to live comfortably for the 30 + years after ceasing work and dramatically reduce the big risk of outliving your money.
An interesting fact: during the GFC share prices of Australian equities fell some 50% whilst the dividend stream fell 20%. Dividends fluctuate much less than the share prices. Term deposit interest rates have reduced 60% in the same period. The 10 Year Australian Government Bond Yield just hit a 100+ year low at 2.00% pa suggesting interest rates may still be on the way down.