Why balancing investments is essential

For senior Australians, managing investments during turbulent economic times is crucial. 

Stock market crashes, while alarming, offer valuable lessons on the importance of balancing a portfolio and safeguarding assets. 

One such lesson is the appeal of term deposits during periods of economic uncertainty, such as a recession. 

Understanding the dynamics of the stock market and the role of safer investment options like term deposits can help you navigate financial challenges and preserve your wealth. 

Diversification is key: Relying too heavily on equities, which are inherently volatile, can expose you to significant financial risk. Diversification means spreading investments across various asset classes, such as bonds, property, cash, and term deposits, to reduce exposure to any single market downturn. For seniors, who may not have the luxury of time to recover from significant losses, diversification is crucial for protecting your nest egg. 

Risk tolerance and time horizon: As a senior, you are likely to have a lower risk tolerance, and a shorter investment horizon compared to younger investors. It’s essential to ensure your investment mix aligns with your financial goals and time frame. You might need to shift towards more conservative investments to preserve your capital. 

The importance of liquidity: Crashes can emphasise the need for liquidity. Having a portion of investments in liquid assets ensures you can access funds without needing to sell assets at a loss. Maintaining a balance between liquid and illiquid assets allows you to meet your short-term needs and avoid locking in losses during a market downturn. 

During a recession, when economic growth slows and uncertainty prevails, safer investment options become more attractive. Term deposits offer several benefits that can appeal to senior Australians: 

Capital preservation: Term deposits are among the safest investment options available. They offer a guaranteed return on investment, with the principal amount protected. In contrast to the stock market, where capital can fluctuate significantly, term deposits provide peace of mind, especially during uncertain times.

Predictable returns: The fixed interest rates offered by term deposits ensure that seniors know exactly what return they will receive at the end of the term. This predictability can be particularly comforting during a recession, when other investments might be experiencing volatility. 

Low risk: Term deposits are backed by the Australian government’s Financial Claims Scheme (FCS) for amounts up to $250,000 per person, per institution. 

Regular income: Term deposits can provide a reliable source of income, which is particularly important for seniors relying on their investments to fund retirement. By staggering term deposits (a strategy known as “laddering”), seniors can ensure a steady flow of interest income while also benefiting from varying interest rates over time. 

Protection against market volatility: Unlike stocks, which can be highly volatile during a recession, term deposits are not subject to market fluctuations. 

For senior Australians, the lessons learned from stock market crashes and the advantages of term deposits underscore the importance of a balanced investment strategy. A well-balanced portfolio should reflect individual risk tolerance, time horizon, and income needs. Here are some strategies to consider: 

• Regularly review your portfolio to ensure that it remains aligned with your financial goals and risk tolerance. Rebalancing may involve shifting funds from higher-risk assets like stocks to safer options such as term deposits. 

• To manage interest rate risk and maintain liquidity, consider laddering term deposits. This involves investing in multiple term deposits with varying maturity dates, ensuring that some funds are always coming due. 

• Market downturns can be unsettling, but it’s essential to avoid making hasty decisions based on short-term market movements.