If you weren't alarmed before at the generational low interest rates on offer, you should be now.
This headline in today's The Australian Financial Review says all you need to know…
"Glenn Stevens tells retirees to get used to low returns"
Regular readers of Motley Fool Take Stock will know I've long been suggesting interest rates are likely to stay low for the long-term.
Maybe you believe me now!
RBA governor Glenn Stevens took it one step further, saying these are the lowest investment yields "in living memory" and in "all likelihood the lowest ever in human history."
And the situation isn't going to get any better. On the contrary, there's still a decent chance the RBA could cut interest rates as soon as next week.
Stevens is mostly talking about government bond yields, referencing Germany's negative bond yields.
It's a bizarre situation where instead of investors earning interest on the money they lend the German government, they are effectively pay a price, albeit a small one, to keep their money safe in government bonds.
Madness, right?
Here in Australia, we're not called the lucky country for nothing — our 10-year government bonds trade on a positive yield of 2.55%.
Welcome to today's weird and whacky world, where central bankers are in a race to devalue their currency, slashing interest rates and printing money. The lower a country's currency, the more competitive they are from an export, manufacturing and therefore jobs perspective.
Here in Australia, to his credit, despite the cash rate being just 2.25%, Glenn Stevens has been reluctant to dive headlong into the race. By comparison to much of the rest of the developed world, our interest rates are riding high.
But the currency markets just might force his hand. Overnight, the Aussie dollar jumped back above US80 cents as currency markets reacted to the higher iron ore price. Fairfax media are dubbing it the Iron Dollar. Nice.
A higher iron ore price is positive for the Australian economy, and therefore reduces the pressing need for an interest rate cut next week.
Talk about Glenn Stevens being caught between a rock and a hard place.
Leave interest rates unchanged and you take a little heat out of the property market, but you reduce your country's competitiveness because your currency stays high.
Cut interest rates by 25 basis points and your currency falls, but probably not by enough, and you further risk inflating the property bubble.
And that, Foolish readers, is why Glenn Stevens gets paid the big bucks.
Whatever happens next Tuesday, know that the investing landscape has changed for every Australian.
No longer can you park your money in a safe term deposit and earn a decent rate of interest.
No longer, at age 65, can you re-balance and de-risk your investment portfolio, putting 65% into cash and bonds, leaving the rest in equities, and live off the interest alone.
No longer should you have over half your portfolio riding on the back of the big four banks and their fully franked dividend yields.
Reading between the lines, my guess is Glenn Stevens was trying to send a warning message to bank shareholders when he said…
"… we have this phenomenon in the financial space where an increasing risk is being taken.
"And it's important people realise how much risk is being taken there and are appraised of it."
Bonds are risky, given the only way for something like German bond yields is up. When yields rise, bond prices fall. No wonder Bill Gross is calling German bond yields the "short of a lifetime."
Shares are risky. But you already know that, seeing it on a daily basis as share prices go up and down depending on the market's mood, and on a company's individual progress.
There is nothing to fear about the market's mood. There's everything to fear about what happens to your wealth when you invest your hard-earned money in highly speculative penny shares. You have been warned.
Zoom out a little though and there's much less to fear about investing in the share market. The longer your time frame, the lower the risk.
The good news about living longer is you can also extend your investing time frame, which in turns lowers your risk. These days, a 65 year old can expect to live at least another 20 years, perhaps even 30 years. It's an investing lifetime.
My 87-year old father is still going strong, living at home by himself. Today, he has a decent cash balance, as should be appropriate for someone his age, but a decent equity portfolio too.
There are several great things about the state of his finances…
1) Diversification. He has investments in many sectors, many companies. Diversification greatly lowers individual company risk.
2) Liquidity. Should he suddenly need the money (highly unlikely, given his cash balances), he can sell the shares with the click of a mouse button. Try selling your investment property at the drop of a hat.
3) Income. Every single company he owns pays a dividend, most fully franked.
4) Tax effective. He offset his franking credits against his other income (dividends and interest income), thereby reducing his tax bill.
5) Protection. His cash balances cushion the blow from any stock market correction, and give him the opportunity to buy more shares if and when the share market wobbles.
My guess is there aren't too many 87 year olds reading this. But whether you're 27 or 87, you should be following the same principles.
The younger you are, the more risk you can take on.
To be clear, I'm not talking speculative mining stocks. They are a one-way ticket to the poor house. Ask any shareholder in rare earths miner Lynas Corporation Limited (ASX: LYC)
I'm talking allocating even more money to stocks.
I'm talking about having your portfolio orientated more towards growth stocks, companies that may not necessarily be trading on a high dividend yield today, but offer more in the capital appreciation potential. A 400% winner can do wonders for your portfolio.
I'm talking about diversifying into other markets, specifically US-quoted shares. With nabtrade (the Motley Fool Australia has no affiliation with NAB) now offering trades for as low as $14.95, it's getting more affordable than ever. The Aussie dollar riding above US80 cents is an added incentive and bonus to invest Stateside. As well as picking the 'best of the best' ASX stocks, a 60% off subscription to Motley Fool Share Advisor comes complete with bonus monthly US stock picks.
Yes, investing in the share market involves taking a risk.
But as Glenn Stevens is effectively saying, low interest rates now, and for the foreseeable future mean if you want to generate a decent income, now or in the future, you have no choice but to take on more risk.
As ever, I'm not suggesting you go the whole hog today, cashing in all your term deposits and diving headlong into shares with every cent you can muster.
What I am suggesting is you gradually allocate more money to the share market. It's a technique that's stood the test of time, whatever the interest rate environment.
To get you started, look no further than Motley Fool Share Advisor's upcoming "Income Extra" feature, where Scott Phillips reveals his Top 5 Dividend Stocks taken from the Motley Fool Share Advisor scorecard.
Last time around, Flight Centre Travel Group Ltd (ASX: FLT) made the list. Since then, the shares are up almost 20%.
I own Flight Centre shares, picking them up in January this year at just below $34. Today, the shares trade at $44.50, a gain of over 30%. Growth and income all conveniently rolled into one share. Investing nirvana.
As for Scott's brand new Top 5 Dividend Stocks, all will be revealed tomorrow. Click here and save 60% off a two year subscription to Motley Fool Share Advisor and find out for yourself which five ASX stocks make the cut.
I have no insight myself into Scott's top five dividend stocks. I'll find out tomorrow, at the same time as the rest of our Motley Fool Share Advisor subscribers.
But courtesy of Glenn Stevens, I do have insight into the long-term outlook for interest rates.
By comparison, a company paying a fully franked dividend yield of 4% — which is 5.7% when grossed up for franking credits — makes for a very compelling alternative to German bonds, term deposits or investment properties.
