As we step into the new financial year, it’s important to look back and understand how different investments performed over the past 12 months. Let’s rank these investments by their relative risk, starting with the safest options.
Risk-Free Cash: The safest investment is cash. Over the past year, the Reserve Bank of Australia’s (RBA) overnight cash rate returned 4.24%. Short-term bank bills from the big four banks did slightly better, returning 4.37%. These bank bills are essentially short-term loans to banks, usually for about three months, and they are unsecured.
Term Deposits: Bank term deposits, which are also unsecured loans protected by a government guarantee up to $250,000, provided better returns, averaging 4.56%. For example, AMP Bank offers one-year term deposits at 5.05%. Generally, you can get higher returns by locking your money away for longer periods or by choosing banks with higher credit risks. However, breaking these term deposits early can incur costs.
Floating-Rate Notes: A more complex but still relatively safe option is investing in floating-rate notes (FRNs). These are bonds that pay interest rates that adjust with the RBA’s cash rate plus a risk premium. For example, a senior-ranking FRN from CBA, rated AA, offers an interest rate of 5.31% annually, which includes an 85 basis points spread above the quarterly bank bill swap rate (BBSW).
Exchange-Traded Funds (ETFs): Several ETFs specialize in portfolios of FRNs. BetaShares’ QPON ETF, which focuses on senior-ranking bank-issued FRNs, returned 5.85% last year. VanEck’s similar ETF, which also includes less liquid corporate bonds, returned 5.40%. Actively managed ETFs in this space can do even better, with top funds returning over 6.5% after fees. For higher returns, you can consider ETFs investing in subordinated bonds, like BetaShares’ BSUB ETF or VanEck’s SUBD ETF, which returned 7.46% last year. Another option is BetaShares’ HBRD ETF, which invests in a mix of senior-ranking bank bonds, subordinated bonds, and hybrids, returning 7.94% last year.
Investment-Grade Credit Funds: These funds invest in high-quality bonds and allow your interest rate to float with the market, avoiding the need to predict future interest rates. For example, the AusBond Composite Bond Index returned 3.68% last year, but top actively managed funds did better, delivering over 8.0% after fees. Globally, the Bloomberg Global Aggregate Corporate Index returned 6.81%, with top managers adding another 2-3% above this.
Private Credit: In the private debt and high-yield bond markets, where loans are made to riskier borrowers, returns ranged from 9% to 10% after fees. However, rising defaults and insolvencies are significant risks here, especially in the current high-interest-rate climate. There are many stories of funds losing money in this space, and investors should be cautious.
Equities and Gold: Equities performed well last year, with the ASX200 returning 12% and global stocks, represented by the MSCI global equity index hedged into AUD, delivering 19.9%. Gold also did well, returning 21.4%.
Bitcoin’s Performance in 2024: Bitcoin, often considered the flagship cryptocurrency, had an impressive run in the 2024 financial year. Starting at around USD$29,000, Bitcoin surged to close the financial year at approximately USD$60,000. This remarkable increase represents a staggering 105% rise in its value, making it one of the best-performing assets of the year. This surge came despite the skepticism and criticism that have often surrounded cryptocurrencies.
Volatility and Risk: However, it’s important to highlight the significant volatility that accompanies Bitcoin investments. While the digital currency reached as high as USD$73,000 during the year, it also experienced sharp declines, dipping back to USD$57,000 by the end of the financial year. This extreme price fluctuation is characteristic of Bitcoin and cryptocurrencies in general, which are influenced by a myriad of factors, including regulatory news, market sentiment, and macroeconomic trends. This volatility underscores the high-risk nature of investing in Bitcoin, making it unsuitable for the faint-hearted or those with a low risk tolerance.
Bitcoin’s Role in Diversified Portfolios: Despite the volatility, Bitcoin’s impressive returns have led many investors to consider it as part of a diversified investment portfolio. The potential for high returns, as demonstrated this past year, can be a compelling reason for investors to allocate a small percentage of their portfolio to Bitcoin. Additionally, the increasing institutional adoption of Bitcoin, with major companies and financial institutions beginning to invest and offer services related to cryptocurrencies, lends some credibility and stability to the asset.
Long-Term Prospects and Considerations: Looking ahead, the future of Bitcoin remains both promising and uncertain. Factors such as regulatory developments, technological advancements, and broader market acceptance will play crucial roles in shaping its trajectory. While Bitcoin’s past performance highlights its potential for significant gains, investors must carefully consider their risk tolerance and investment strategy. The extreme volatility and speculative nature of Bitcoin mean that while it can offer substantial rewards, it can also lead to significant losses.
As we look forward to the new financial year, potential market volatility is a concern, especially with the uncertainties surrounding a potential Trump presidency. Market reactions could vary widely, influenced by potential tax cuts, deregulation, or concerns over increasing US budget deficits and sovereign debt crises.
We are here to help you navigate these complexities and provide sound financial advice tailored to your investment goals and risk tolerance.
