The answer to building certainty is not more cash reserves


Denis Donohue

Falling cash rates at historic lows means retirees face increased risk and an uncertain future, especially if they outlive their savings.

Today’s RBA rate cut is a seminal moment for SMSF trustees as investors consider taking on more low yielding cash reserves. Walking a tightrope means balancing low yielding cash on one hand with risks to capital on the other.

Regrettably, many trustees will likely add more cash, if history is a guide.

According to the Weekend AFR*, ATO data shows that SMSFs have added $19 billion to their cash holdings over the past two years.

“Too much cash at low yields means less growth and the further risk of outliving your capital. Trustees should be aware of the opportunities to retain exposure to higher yielding Australian shares, but with much less risk.

“The answer is putting a safety net under the investor’s tightrope in the form of portfolio insurance.

“We can’t blame trustees for seeing heightened risk in a stock market at current high levels in the face of an uncertain economic outlook. However, simply withdrawing funds from the market and parking the proceeds in cash or other low-yielding assets means many trustees won’t be able to meet their income needs. There is a better way to protect existing funds invested in the stock market while continuing to generate attractive income yield of 4-6% through dividends.

“High levels of cash holdings cannot be a sensible plan for a portfolio that has to beat inflation to keep its intrinsic value and also pay pensions,” said Denis Donohue from Pentalpha which manages retirement assets for clients to meet their income needs.

By Denis Donohue, Executive Chairman and Head of Investments

*AFR Weekend Smart Investor, 1 June 2019, page 32.

You must be logged in to post or view comments.