Investors should allocate greater amounts of their portfolio to fixed income and away from cash, according to Vanguard, with the RBA likely to reduce interest rates below two per cent for the next few years.
Vanguard's investment strategy group global chief economist, Joe Davis, said he is concerned Australian investors are not adequately diversified and are overly reliant on cash and the Australian housing market.
“The outcome two to three years from now is likely to be [interest rates] below two per cent rather than above two per cent,” said Mr Davis.
“We just think it’s more likely that they could be easing policy a little more aggressively just because of domestic conditions.”
Given Vanguard’s predictions of a lower interest rate environment, Mr Davis said it is vital investors are diversified into other assets, particularly fixed income.
“We believe that fixed income has a more powerful diversification benefit than whole investments in cash,” he said.
“Over long periods of time, cash investment is a very poor core holding because your expected real rate of return is going to be 100 basis points lower than the average fixed-income investment because cash has often struggled to keep up with inflation or has been at the rate of inflation.”
The diversification value of bonds, he argued, is greater today for long-term bonds than it has been in the past due to the low interest rates.
Vanguard also announced it will be launching two international fixed-income ETFs next week, the Vanguard International Fixed Interest Index (Hedged) Index ETF and the Vanguard International Credit Securities Index (Hedged) ETF.
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