Paul Costello (no relation to Peter) is the head of the $60 billion Future Fund's management agency, responsible for directing the investment policy of the fund. Yesterday he appeared before a Senate estimates committee. At that hearing Mr Costello has said that the fund has been forced to buy risky assets to generate a minimum return of inflation plus 4.5 per cent. In particular he said the fund is focussing on assets outside of debt markets because "in the longer term that's not where we're going to see the returns that we need to deliver on the government's objectives."
Mr Costello's comments remind us of the key underlying principle of investing - risk and returns are related. If you need or are looking for higher returns you need to seek investments that are riskier.
The same dilemma is being faced by smaller investors of the street. With the official cash rate plunging 4% over recent months to 3.25%, with possible further small reductions to come, the option of sitting in cash becomes a much more difficult proposition. This should remind all of us of the poor ability of cash as an investment to fight inflation.
Back in December Scott Francis put together a report looking at this very question by tracking the income returns from Australian shares compared to cash since 1982. This report provided a stark reminder of the benefit of Australian share income over time compared to cash. To read a copy of the report please click on the following link - Benefit of Australian Share Income.
Unfortunately the decision to move into riskier asset classes is not an easy one, especially in terms of the current market. The key question everyone is asking is can growth asset prices fall further? The answer is definitely yes they can. Will they? That's anyone's guess.
If you do make the decision, like the Future Fund, to invest more into growth assets the key for us is to take a measured approach. Don't be throwing everything at growth assets all at once as you could invest one day and see the market slip away further. To protect against this downside our approach is to be regularly investing into growth assets over time. Interestingly, this is the very same approach undertaken by the Future Fund on a much larger scale.
If you wanted more information about our approach to investing please take a look at our Building Portfolios page.
Bye for now,