Looking beyond your business

Key points

• Interest rates are on the rise, but they are not keeping pace with inflation.
• As the real returns on cash investments potentially diminish, this could be the right time for business owners to look at diversifying their personal investment portfolios.

Uncertain economic conditions have made planning for the future a particular challenge. In the past, investing in cash assets such as term deposits may have been a prudent way to keep your funds growing with minimum risk. However, the pace of inflation has increased significantly, rising from about 3% p.a. in 2021 to more than 6% p.a. for the quarter ending June 2022 according to the ABS. That makes it more difficult to continue earning real returns after inflation, without adding a greater variety of investments into the mix.

There are plenty of reasons why inflation is becoming a problem but, as many business owners are aware, a big factor is the mismatch between demand and supply for goods and labour. 

“It’s difficult for the Reserve Bank of Australia to manage quickly rising inflation because part of the inflationary pressure comes from global supply-side issues. Global supply chain problems have been a catalyst for the pick-up in inflation,” says ANZ Senior Economist Felicity Emmett.

But strong demand in Australia is also contributing. It is a perfect storm of high demand and limited supply, she says. “We’re seeing stronger demand in Australia and that’s lifting services inflation.”

After higher-than-expected inflation in March, the RBA started raising the cash rate in early May and is expected to lift the rate further in coming months. ANZ predicts a rise to a 3.35% cash rate by November 2022.

Why it’s time to diversify

After more than a decade of record low interest rates, it is going to get much more expensive to borrow money. At first glance those higher interest rates could be a plus for cash investors, but that is not the whole picture. 

“The driver, with inflation where it is at the moment, only exacerbates an investor’s need to diversify,” says ANZ Head of Research Ben McBride.

“With inflation higher than average, when you’re looking at money in real terms, cash isn’t going to be a saviour for people who are in cash options.”

While interest rates are on the rise, they are not keeping pace with inflation. Having that money locked away may be an issue as its buying power is diminished.

“Liquidity comes from ensuring that you have a well-structured portfolio to give you access to funds when you need it,” says McBride. “Different clients have different liquidity requirements; as an investor you want to have access to a portfolio that best meets those needs.”

He adds that it is important to get expert advice before making changes to your cash strategy. “That really is a discussion that you should have with a financial adviser who understands your needs.”

Rethinking your personal wealth strategy

Many businesses and individuals end up holding substantial funds in private accounts or simple fixed interest investments. In the past this approach could deliver steady returns, but the current environment makes this passive approach more challenging.

Having a relationship with a financial adviser is valuable as they can have additional perspectives on how you can make the most of your assets. They can help you form an overarching strategy that considers your personal objectives and goals.

An ANZ Private Adviser can provide as much – or as little – assistance as you’d like with managing your personal finances. This can include helping with SMSFs, family trusts and investments, working with your other trusted advisers, or estate planning lawyers.

ANZ Private Adviser Angelique Poulakis says she enjoys developing complex and tailored strategies that are in line with an individual’s goals and risk appetite.

“Regardless of how much money you have, everyone has a unique circumstance,” she says. “We work to understand what our clients are looking to achieve and then can work with their professional network.

“Business clients who have really complex needs need a solid foundation to build on their existing wealth, while also passing that wealth onto the next generation.”