The old adage, that the only thing constant is change, applies to investing too.
Many people, retirees and others, have chosen investments in past years that provide diversity and balance, often with the help of professional advisers.
Ultra-low interest rates may now make changes necessary.
Investment theory says it's wise to use a range of investments to spread risk, to avoid the danger of too many eggs in one basket.
Investment advisers analyse the split of a portfolio between defensive and growth assets.
Defensive investments include cash and interest-bearing securities like government bonds and loans to large companies.
These are obviously secure and stable.
Growth assets include property, share and infrastructure investments both in Australia and overseas.
They are far less predictable with more variable values but have always provided higher returns over the long term.
Cautious investors might have two-thirds of their money in defensive areas and one-third in growth assets.
Many investors have traditionally had around one-third defensive and two-thirds growth.
More adventurous types might have 80 per cent growth.
Defensive investments used to earn three to five per cent per annum.
That has changed. They now earn next to nothing. Bank deposit rates are about a quarter-of-one per cent per annum.
The government recently sold short-term bonds into the market at a negative interest rate. At minus 0.17 per cent investors will pay the government to hold their money rather than the government paying them.
The typical balanced investor with 40 per cent defensive assets now has 40 per cent of their money earning almost nothing.
The cautious investor has two-thirds earning nothing and even the growth investor has 20 per cent providing no meaningful return.
Interest rates are unlikely to rise for some time but when they do there may be worse news.
When rates rise the value of long-term income securities with interest rates fixed for years falls. This could turn returns negative.
This creates a real dilemma for investors. If part of their portfolio is earning nothing what should they do? Should they switch their mix to hold less defensive investments and more growth?
Defensives provide a great cushion when things go wrong with share and property investments, as they eventually will. We should all hold some. The other concern is that share and property markets are at or near record highs. No one wants to buy at the top.
Yet being at high levels doesn't make a crash imminent. The extreme low borrowing costs and worldwide government and central bank stimulus programs could mean values will rise quite a bit further yet. It may be time for a review if one hasn't been done recently.
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