Investors should veer away from the trend of heavily investing in cash to generate higher yield and protect against poor returns, MLC Investment Management senior strategist Michael Karagianis said yesterday.
Many investors are increasingly reluctant to stick with traditional investment strategies given the disappointing returns and volatility in recent years.
This has caused a flood of investment into cash and bonds, which have given positive returns since the global financial crisis (GFC) with little or no capital risk.
However, Karagianis said it was unlikely strategies based on cash and bonds alone would generate sufficient returns to meet investors' needs going forward.
"Investors should look for a lot more building blocks than what they have currently relied upon until now, which is very much a cash-bond-type strategy," he told InvestorDaily.
"Both of those could fall down quite severely over the course of the next few years, simply because interest rates are so low now.
"Cash trends are going to be a lot lower ... and bond rates are probably in bubble territory. The dangers are that people could actually lose money from investing in bonds too aggressively because of good historical returns they expect that will continue and that will not likely be the case."
He said investors should take a broader-based approach to constructing an income-oriented portfolio.
"You can potentially generate a higher return than you're getting from a cash-only investment, which is going to be important because most people aren't going to be able to survive on cash returns moving forward," he said.
"And because it's more diverse it will be able to generate more returns and a wider range of environment because people have the ability to lean on different building blocks."
Cash investment was still likely to be higher than before the GFC because of residual concern about investing in risky markets, he said.
"But investors are running out of options and returns in cash just aren't as attractive as they were a year ago," he said.
"You start to find that the money starts to move back again, and with the property market not likely to do well either, that's probably not an option for many investors.
"So in terms of generating yield, we think that they're just going to have to take a broader view and that will probably mean reallocating some of their cash investment."
He said more sophisticated solutions, such as absolute return, credit, alternative asset classes and equity income strategies should be considered.
