Why Past Financial Events Are Impacting Your Future
Perhaps a financial rethink is in order!
Given the events of 2020, no one really knows what the lasting economic impact of the Coronavirus will be, however the new world will not be like the old world. We will need rethink our approach when it comes to our finances and investments.
Sometimes our previous behaviours and experiences can hold us back by stopping us from moving away from circumstances that are no longer relevant. This is known as the ‘anchoring bias,’ where we continue to base our thoughts and expectations on information that has become outdated.
Can you remember Australia’s last economic recession? It was in the early 1990s and followed a period in which the economy had become strained. During the 1980s the Consumer Price Index, or CPI – had risen as high as 12% per year and had rarely dipped below 5%. Mortgage rates were as high as 17%. Life was expensive! I can remember it clearly, I was in grade 10 at high school, and my parents were under immense pressure to pay the mortgage and the household bills, and school fees.
For many of us who experienced this period of high inflation and high interest rates, this still impacts our thinking about debt and the economy. We still hear political commentators worrying that the budget deficits and inflation even though the current official inflation rate is actually a negative number (-0.3%, according the ABS figures for June 2020). Prices are actually falling, on average, and many people argue that inflation is actually now less of a risk than deflation (the chance that prices will continue to fall in the medium to long-term). Inflation seems a very remote prospect and inflation in the double digits would be almost impossible. However, the 1980s experience of 12% inflation was so intense that many people remain anchored to the idea that inflation is always a risk.
We often hold on to our personal attitudes to do with money – how we approach debt, for example, or what we consider to be a stable job or industry. For investors, we will need to rethink what constitutes a reasonable return from the traditional asset classes. As it’s expected that in the short term lower returns will be the new normal.
To give an example, www.finder.com.au reports that in June 2011, a 12-month term deposit with the NAB yielded an interest return of 6.18% per annum. In August 2020, the return for a 12-month term deposit with NAB is 0.85%.
For many of us this return is very unappealing and may lead to deciding to move money into the share market, where a higher yield/returns may be possible. However, investors will need to remind themselves that the key role of an investment like a term deposit is ‘defensive’ – to preserve capital, not generate a return. Often chasing a higher return can come at a significant overall cost if it means taking on more risk.
At Financial Streams we want to ensure that our clients and potential clients are being reminded on a regular basis that things are changing, and good quality financial decisions require good quality advice relevant to today’s circumstances.