120 Days of War

The war in Ukraine has now entered its fifth month and the ripple effects are increasing right around the globe.

As major exporters of wheat, barley and corn, Ukraine and Russia are in some respects the food bowl of Europe, Africa and the Middle East.

Russia is also a major producer of fertiliser and petroleum, and disruptions caused by the war are compounding existing supply chain issues, driving up the price of food and fuel, and pushing millions of people into hunger.  When people are hungry, social and political unrest quickly follow. 

In Australia we have seen significant increases in the cost of living, rising interest rates, falling house prices and negative returns from both the share market and the bond market.   

A double whammy

It’s rare for share markets and bond markets to fall at the same time.  Common investment wisdom says that shares and bonds offer diversification benefits when placed in a portfolio together, and that bonds are suitable for conservative investors, with low risk of capital loss.

But higher than anticipated global inflation and the response of central banks worldwide in lifting official interest rates rapidly have changed that.   In the 12 months to 30 June, Australian shares have fallen 10%, while the Australian bond index fell even further; by 11%.

The share market losses have been a result of negative sentiment given all the uncertainty, but soon the higher costs of doing business will flow through to reduce company earnings.  The bond index has fallen because rising yields reduce the attractiveness and capital value of existing bonds.

Over the past six months bond yields have increased significantly.  In fact, the yield on 10-year Australian bonds has more than doubled from 1.67% pa to 3.5% pa.

Returns matter for retirees

Most retirees have lost money in the past 12 months. The double whammy of falling shares and bond prices means that investors suffered losses whether they were invested in growth, balanced, or even conservative portfolios.

It’s not great timing for people approaching retirement or in the early years of their retirement. This is the time when investment returns matter most. Because our super balances peak around this time, negative returns are amplified. It’s called the ‘portfolio size effect’.

Silver lining for retirees

But there’s a silver lining in all of this for retirees. In recent years retirees have had the challenge of investing in a record low interest rate environment.  Retirees need income to live, so they have been forced to regularly sell their investments to fund their retirement or invest more aggressively.

Higher official cash rates, and higher bond yields make things easier for retirees. For example, higher interest payments provide an opportunity for retirees to fund their lifestyle by buying a series of fixed interest investments in a strategy known as ‘bond laddering’.

It works because when fixed interest investments like term deposits and bonds are held to maturity, there is no capital loss.

So, you can have confidence to spend in retirement even during uncertain times. If you’d like to learn more, please give us a call.  We would love to help

Daniel Crump is the founder of Daniel Crump Financial Planning.  This article is general and does not consider your personal circumstances.  If you would like advice specific to you, give us a call on 0418 148 622.