We are also publishing a series on Investment Basics Explained, which is designed to help our members learn investment lingo and understand the basics. This series covers terms such as Shares, Volatility and Risk vs Return.
But for those who want more, we have Super Masters. Let’s dive in!
Inflation represents the increasing costs of goods and services. On a day-to-day basis, we will experience this as an increase in the cost of living, from the food that we buy to the household bills that we pay.
But why does this happen? It can be driven from two angles: increased demand or reduced supply.
When resources are in high demand, some people may be prepared to pay more to ensure they can buy it. A good example of this is property.
Alternatively, when a resource has reduced supply (also known as experiencing scarcity), it pushes prices up. To demonstrate this, think about the prices for petrol at the petrol station; when the supply of petrol is falling, the price goes up. This is because the demand for petrol is the same, but there is less petrol available.
At HESTA, we continue to invest in a range of assets, including products that are more insulated against inflation risks.
Liquidity represents how easily an asset can be bought and sold.
For example, on the stock market, shares in a big Australian company are generally very liquid and are traded in high volumes every business day.
Alternatively, some assets, such as commercial property, are not frequently traded and are therefore less liquid. As such, if someone was to sell an illiquid asset, they may be required to accept a lower price to realise the transaction.
Investing in illiquid assets can earn HESTA members an extra return, known as an illiquidity premium. However, it’s also important HESTA can meet our cash flow requirements and liabilities, such as income stream payments. Therefore, we incorporate liquidity needs into our investment strategy for each investment option.
The yield curve is a graph that plots the yield (or interest rate) of bonds for different maturities.
Some bonds have a very short time to maturity (e.g. 1 month). Whilst other bonds have a long time to maturity (e.g. 10 years). The yield curve displays the different yield between bonds of short maturity and long maturity.
Typically, the yield curve rises, since investors will demand more yield if they commit to a longer-term bond compared to a shorter-term bond. This is because longer investments require more compensation for the uncertainty around future interest rates and inflation.
A negative yield curve is when the yield on shorter bonds is higher than the yield on longer bonds. This is an uncommon occurrence and may be a sign that investors are more pessimistic about the future.