Lower returns, what should you do? - DMG Diversified Portfolio

Financial markets continue to struggle along and despite some positive returns during July, the 2016 financial year and the period ahead does not fill us with a great deal of excitement. Maybe having a conservative outlook is a necessary quality to successfully operate an investment portfolio. Certainly, if you are not humble about your investment ability the financial markets will, soon enough, deliver you a strong dose of humility.

Lower for longer (investment returns) is certainly a common theme and one held by Bart Dowling, the Portfolio Manager for the DMG Diversified Portfolio. We are seeing zero and negative interest rate policies being implemented around the world. This doesn’t seem to be helping the world economy to grow and is certainly not helping investors. At a simple level, the returns for any investment portfolio are made up of the investments within that portfolio. A portfolio made up of shares will provide returns in line with the share markets, one made up of term deposits will produce the rates on offer, a portfolio with a portion of each will …. you get the idea.

It is very hard to argue a case for sustained, higher levels of returns. Of course, consensus views such as this can be proven wrong and we would be very happy for this to be the case. However, the reality is that the world has too much debt, very little room to use interest rates as a lever and continues to experience low levels of economic growth. This is far from an ideal backdrop that is supportive of high investment returns.

What should you do about this?

A good place to start is to accept that the golden days of 10 percent plus, long term, investment returns are behind us. At least for some years. A number of experts are talking about a decade or more. Also,keep in mind that for some this may not be a big problem. Those that have sufficient room for error in their long term plans will have enough wealth to live the life they want, even on lower returns. Those that do not, will need to review their plans and consider the impact of the changes. At one level, it may be that you run your capital down a little earlier than originally planned. Can you handle running out of capital at say age 95 rather than 100? Maybe your money runs out sooner unless you make changes to your spending plans. This will mean re-prioritising what is important to you.

This is where your DMG Financial Planner can really add value. Our team is highly skilled at analysing and projecting your financial situation. We can also help with the discussion about working out what is truly important to you. We will initiate contact with you, as part of our regular review process, however, if you would like to meet sooner please, as always, contact us.

What is DMG doing about this?

At the portfolio level, we are remaining focused on our stated aims. Firstly, we place high importance on protecting your investment capital. We have been happy with the way that portfolio has held up in the face of falls in financial markets. In most cases, we have been able to avoid losses and worst case, the impact of the losses have been greatly reduced.

Secondly, we continue to look to add value by delivering an acceptable investment return. Our target is the cash rate plus four per cent. With cash rates at historically low levels, this means a total return of around six per cent after fees. Over the last 3 years we have delivered results at this level.

We continue to look for ways to add investment returns without placing your investment capital at unnecessary risk. The investments we use are constantly reviewed as is how well they combine together to construct the portfolio. In coming months we are undertaking a large-scale review of the funds we hold in the Australian small company sector. This is not driven by any concerns. In fact, we are in the opposite position. We are very happy with this sector. We simply want to ensure that the funds we use are providing the best value for the portfolio. We also want to appoint a manager to have as a reserve. This means that if one of our existing managers was unexpectedly considered no longer suitable, we could easily make a change. This is important because, the full research process for appointing a new manager can take months.

As your financial planner, we focus on helping you achieve your aspirations. Understanding what is important to you is the first step and then researching and recommending strategies that help you best achieve these, whilst considering the changes in the financial markets is next. We are confident that we have you well covered on a number of levels and will continue to deliver on our commitments to you.

By Gary Lucas, DMG Diversified Portfolio and DMG Financial Planning, Sale and Yarram in Gippsland.