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We get it. Investing can be infuriating. Whether you’re just starting your first job or are well into retirement, there is an extraordinary array of choices to make. Economies grow and decline, markets rise and fall and new investment opportunities and products appear every day.
There are so many options and there is so much noise that you could almost be excused for putting it into the too-hard basket. But you can’t. Too much depends on it. As the old saying goes, if you fail to plan, you are planning to fail. And very often your choices will determine not only your own quality of life, but also that of those you love the most.
Would it help if you knew that it actually wasn’t as difficult as it seemed? That there is a simplicity on the far side of the apparent complexity? That you can be a successful investor without a degree in economics and finance? Because it isn’t, there is and you can.
In this Investment Enews we consider once again the two simple steps to investment success.
Step 1 – Save
Over the years, we have returned repeatedly to the famous words of Charles Dickens.
“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
They are as true today as they ever were. The generation of wealth begins only when you start to save. For those on a low income, saving can seem like an impossible dream. In fact, it’s a habit. Whether the amount you can save is large or small, start today.
So how can you do that? For some, the first step is to pay off unproductive debts. Pay off your credit cards and personal loans. Consider debt consolidation if that will help you obtain a lower interest rate on your debt. At all costs, eliminate the interest expense that is holding you back.
 The second step is to implement a regular savings plan. It might help to have part of your salary directed to a separate account as automatic savings. Remember that the earlier you start, the better. Those who are wise enough to begin saving in the 20s can build an unbeatable lead over those who start later. The power of compound interest – that inexorable law of mathematics – sees to that.
To see how this could be the case, consider the following scenario. Imagine you put aside $10,000 at the end of each year for your retirement. Imagine further that your investment is earning just over 7% p.a. (the average annual return of La Trobe Financial’s 12 Month Term Account since inception in October 2002).
After year one, you would have your initial $10,000 investment. After year two, you would have $20,721, being your contributions of $20,000, plus interest of $721. After ten years, you would have $139,543, being your $100,000 of contributions, plus $39,543 of accumulated interested.
Here is where things get really interesting. As your principal sum grows, you earn interest on the larger amount. That means that the amount of interest you earn grows each year. In year two (after making your initial investment) you earn $721 in interest. After year ten, you are earning $10,061 in interest on top of your regular contribution of $10,000. But after year twenty you are earning $30,244 in interest and after year thirty you are earning a massive $70,734.45. What’s more, your principal amount at the end of year 30 is $981,060, despite your total contributions coming to just $300,000.
If that’s not incentive to start saving now, nothing will be.
Step 2 - Invest
Of course, saving by itself is unlikely to get you where you need to be. As has been talked and written about ceaselessly, interest rates on bank deposits are at record low levels. The global financial crisis (GFC) has had an extraordinary impact on economies across the world and central banks have responded with the loosest monetary policy ever seen. Although we in Australia were spared the worst of the economic hardship, our Reserve Bank has had to respond likewise. If we were to keep our interest rates at too much of a premium to those seen overseas, there would be a flood of money into Australia from overseas investors looking to take advantage of the higher rates. The demand for the Australian dollar would send our currency soaring, making our exports uncompetitive and destroying jobs.
The problem that this presents for investors is undeniable. Whereas once it was possible to achieve a reasonable real (after inflation) return on bank deposits, record low rates now mean that even the highest rate bank deposits are barely keeping their value. Unfortunately, Australia’s savers are paying the cost of the emergency policy settings that our regulators are implementing.
Making things worse, some investors have reacted to the ending of cash as a viable investment by taking on massively increased risk. We have seen some investors move into complex and exotic products that promise a higher yield. We have seen others move into the share market, chasing dividends, heedless of the risks to their capital from share market volatility and the questionable sustainability of dividend payout ratios massively beyond any seen before.
In selecting your investments, remember that there are some very simple rules of investing. If you stick with these, you are unlikely to go too far wrong.
1 – Keep it simple, silly
As we have repeatedly said over the years, Warren Buffett was right. Investment is not like Olympic diving and you do not get bonus points for degree of difficulty. If you do not understand an investment, do not invest in it. If you cannot see how the investment could go wrong, you should not be in it in the first place.
2 – Do not put all your eggs in the one basket
Behind all the theorising about diversification lies the simple truism that many of us learnt at our grandparents’ knees. You simply must spread your risks. Whenever an investment product goes bad, we hear heart-breaking stories about people who have lost their life-savings. Don’t let that be you.
3 - Getting rich slowly never goes out of fashion
The third rule is the golden one. If you save and invest regularly and start early, there will be no need to go chasing risky returns. Let the power of mathematics and compound interest do the hard lifting for you.
You may also wish to see an adviser. A good adviser will expertly assist you identify and understand your financial objectives and help you implement the best strategies to achieve them. Critically, they will be able to draw on the experience of thousands to help you avoid some of the tempting traps around the investment world.
Property market update
We continue to get feedback and questions in relation to the daily commentary and prognostications on the Australian property market. Here are a few of the more recent developments.
 Borrower rates are going up
We’ve been predicting since late 2016 that a combination of increased capital requirements, regulatory action and market dynamics will force borrower rates up in 2017. This is beginning to occur with most banks making material out-of-cycle adjustments to their borrower rates, especially for investment loans.
In our view there are still more of these increases to come, regardless of what the Reserve Bank does with official rates. Unfortunately, it is unlike that this will lead to increased rates. Banks will be looking to offset increase capital requirements.
Continued divergence in property price growth
Sydney and Melbourne continue to surge, whilst the rest of Australia (ROA) stays flat. Partly, this is because much of the current population and economic growth is being experienced in these eastern capitals. However, some are beginning to argue that we are witnessing a secular shift in property values in these cities as they start to be seen as ‘global cities’ and thus attract significant levels of offshore investment. When seen in that light and compared to other global cities like New York, London, Shanghai and Hong Kong, prices in Sydney and Melbourne are modest, rather than inflated. Time will tell whether this phenomenon is lasting.
In other news, signs of stress in the form of substantial advertised discounts are beginning to show in the Brisbane apartment market, reflective perhaps of localised oversupply issues that we pointed to at the start of the year. By contrast, vacancies in Melbourne have dropped to record lows.
This, of course, reinforces the point that there is no one ‘property market’ but rather a network of markets each driven by individual factors.
 Turnover rates are puzzlingly low
Generally, a heated property market is associated with high property turnover rates. However, the Reserve Bank statistics are showing a very low turnover rate – more like what was seen in the early 1990s. So what is happening? There are a number of suggestions. Some attribute the reduction to the increased role of renting – people are waiting longer to move from renting to buying property and this is reflecting in lower turnover rates. Others point to decreasing interstate migration rates (although note that overseas migration seems not to have the same effect). The RBA argues that high levels of apartment activity skews the data – many apartments are purchased off the plan, but not settled for two to three years, during which time little is known about the property.
Here comes more macro
‘Macro prudential regulation’ has become the phrase du jour in Australian financial circles over the last eighteen months. This is simply a fancy way of saying that our regulators are using banking regulation to manage the economy. Most recently, APRA has mandated that the banks keep interest only loans at a maximum of 30% of new lending – down from the current rate of 40%. La Trobe Financial estimates put the size of the required decrease at around $30 billion in loans per annum.
What’s more, it’s likely that there is more to come. Look for further restrictions on investment loans.
Wrapping it all up
What you are seeing in your local property market at the moment will depend very much on where you live. We’re continuing to see change and evolution in key market dynamics and are likely to do so throughout 2017
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