Home' Forge : Vol 2 No 2 Contents But fnding that minimum,
consistent fve per cent return is
harder than it seems. It requires
investing in shares, and with
that comes higher risk and the
possibility that the retired couple
could lose some of the savings if the
share market falls.
Hundreds of thousands of
investors face a similar challenge:
how to achieve higher yield
from stocks and bonds while
minimising risk. It partly explains
why blue-chip stocks, such as
the Commonwealth Bank (CBA)
and Telstra Corporation, have
performed strongly in the past fve
years. Income-focused investors
have focked to stocks with reliable
That in itself is a problem.
Buying stocks that everybody
else is buying inevitably means
paying higher prices and risking
capital loss. Prominent dividend-
paying stocks, such as those in
infrastructure or property, are
among the market's dearest.
Moreover, some investors are
treating stocks like bonds or cash
deposits, even though stocks
have greater risk. Why invest in a
Commonwealth Bank (CBA) term
deposit and earn three per cent,
when CBA shares yield around
eight per cent after accounting for
franking credits? But the return on
CBA shares could be a lot less if its
share price falls.
The solution to this income-
investing challenge is threefold.
First, seek good advice from a
licensed fnancial adviser who
understands your income needs
and can design a plan. Second,
ensure that your portfolio has
an appropriate asset-allocation
strategy that spreads investments
across cash, fxed interest, listed
property, local and international
shares -- in a way that achieves
your fnancial goals and suits your
stage of investing.
Third, look for ways to improve
yield in the portfolio and minimise
risk. For example, instead of
buying a handful of high-yielding
shares, invest in a fund that holds
dozens of stocks (thus providing
better diversifcation) and offers a
Owning shares directly has its
place in yield portfolios (that
strategy is considered below).
But some old and newer-style
financial products can achieve
similar yield returns (after fees)
with less risk, and they benefit
from professional management.
Here are eight strategies to
consider, ranked from lowest to
highest risk. Remember; seek
fnancial advice before acting on
the ideas below, or any others
presented in the mainstream
media. Such ideas do not consider
your specifc fnancial needs.
Investors could be forgiven for
running a mile from cash, given
puny returns on bank term deposits.
Still, every portfolio should have
some cash allocation to enhance
diversifcation, provide funds
that are quickly accessible in an
emergency, and have money sitting
on the sidelines to buy assets when
Cash allocations will vary according
to the stage of investment.
Conservative investors who are
in retirement, have a moderate/
low-risk appetite, and can tolerate
negative returns one year in every
nine, might have 20 per cent of their
portfolio invested in cash.
Investors who are fve years from
retirement, and can tolerate a
negative return one year in every
fve, might have fve per cent of their
balanced portfolio in cash. They need
certainty and lower risk, and a small
cash allocation helps to provide it.
At the time of publication, term
deposit rates for $500,000 or less,
invested for fve years, were
slightly above three per cent.
Newcastle Permanent had the
highest rate at 3.8 per cent in its
Gold Term Deposit, followed by
Rabobank's 3.5 per cent in its
online term deposit, according to
comparison site InfoChoice.
2. Government bonds
Fixed-interest and higher-yield
income products have a critical
role in portfolios. Conservative,
retired investors might allocate half
of their portfolio to fxed interest,
and those who are fve years from
retiring might have 30 per cent in a
Australian Government Treasury
Bonds are a good starting point for
risk-averse investors. Exchange-
traded Australian Government
Bonds (AGB) on the Australian
Securities Exchange provide easier
access, and can be bought in smaller
parcels compared with buying
government bonds in 'over-the-
counter ' markets.
Several AGBs have a coupon rate
above fve per cent. But their
running yields (the overall return
for investors who buy the bond
at today's market prices) are
less. A three-year government
bond yields almost two per cent
annually, and a 10-year bond
yields around 2.6 per cent -- less
than bank term deposit rates.
Infation-linked AGBs suit older,
retired investors, the value of whose
60 // wealth creator
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