Self-managed superannuation funds (SMSF) members should look to reduce their cash allocation by investing in bonds according to Credit Suisse research analysts.
The analysts found that SMSF members (selfies) were typically conservative equity investors, who focused on high dividend paying stocks that generally provide low volatility, but also held a considerable proportion of their assets in cash, which they said provided a relatively low yield when compared to government bonds.
The researchers reported that 43 per cent of SMSF assets was invested in equities, while 28 per cent was in cash, and a further 24 per cent was invested in property, while less than five per cent was invested in bonds..
Although this investment allocation has provided selfies with “respectable” post-tax returns, Credit Suisse reported that it “leaves them vulnerable to bouts of market volatility in the future” and recommended that SMSFs should focus more on bonds than cash.
“We think cash is a poor replacement for bonds. Bond returns are usually negatively correlated with equities which help balance portfolio returns — especially during brutal equity bear markets,” the analysts said.
“An allocation of 50% Aussie equities and 50% 10-year Aussie government bonds has lost money in only three of the past 34 years.
“One hundred dollars invested in June 1979 is now worth $4740. Meanwhile, cash tends to have a zero or even a small positive correlation with equities so it does not provide the same 'portfolio relief’ during stock market sell-offs.
“An allocation of 50% Aussie equities and 50% cash (term deposits) has lost money in five of the past 34 years. One hundred dollars invested in June 1979 would now be worth 'just’ $2820. As retirement age looms closer we imagine selfies would not want their portfolios overly exposed to a single asset.”
