Where to invest?

[lizzie]

There are some really interesting threads popping up in the Economic sections ... some scaring the willies out of me (as designed) and left me wondering.

If all things come to pass and the world is plunged into a downturn (dragged by Europe and USA) - where should one put their money that will get a suitable IRR?

Don't want to put it into gold, as can't get a dividend off gold on which to live on - or use for further investment.

Is it cash in bank at 6%.

Is it blue chip shares putting off good dividend/value ratios?

Is it put in bank until property takes a hit and then jump back into IP's?

I am feeling rather lacking in confidence this time around as, with hubby being over 50, I know it's our last cycle to set things up properly - and I don't want to risk it all as I did last cycle.

Last 2003/4 property cycle made some great returns but pushed to hard and made some serious loses too.

Made a great return in the 2010 property upkick, but just got lucky as weren't poised for it.

2008/9 made some serious share mistakes - but made fabulous returns the cycle before.

I fear my investing mojo is missing in action - or maybe it's more a case of learning more, so suffering overload paralysis from to many options.

 

[marg4000]

Well Lizzie, we are a decade ahead of you and are in the serious wind-down to retirement within the next 12-18 months.

We have one IP left, mainly because it is in an area we MIGHT want to move to and we really don't want to make a decision yet. Just signed another 12 months lease to the tenant so that defers any decision for another year. It is basically neutral in cash flow and gearing.

Most money tied up in cash/bond units of superannuation, some direct shares, and a fair chunk stashed in the bank at 6.35% interest. I am in a defined benefit fund so my super is relative to salary.

For the moment we are not looking for much growth, we are more concerned with protecting capital. I guess we are sitting on the sidelines watching what unfolds.

Over the years both property and the share market have been very kind to us.

Property is sluggish, shares are bouncing around, the Aussie $ fluctuates wildly. I guess we are not young enough for the roller coaster ride at the moment.
Marg

 

[Rockstar]

It's a hard one Lizzie without knowing your full situation. I am 100% in property and have no desire to invest anywhere else. I only see brightness ahead with what I am doing and am enjoying the journey. I think the problem for you may be the uncertainty and reduction of enthusiasm and vision rather than what asset to invest in? Like you say, you may be reading too much negative opinion rather than focusing on where you want to be in life. Didn't you have goals related to charity and volunteering? Have you lost sight of the big picture and begun worrying too much about the mechanics of how you are going to make more money?

Sorry if this seems critical. Just trying to provoke some thoughts which may help resolve your situation. You are a mine of experience and have given plenty to this forum. I think you are just suffering from a little ambivolence. We all have obstacles to overcome. All it requires is the mental strength and motivation - easier said than done.

All the best for a positive resolution. Maybe a good long walk (and think) along that lovely beach of yours may be a nice start.

 

[Nathan]

In my opinion debt is the best asset class.

I say that by meaning the only way we can get out of this is for inflation or print more money (globally). This will then in turn make things rise, and therefore my saying (I need to get trademarked) "Debt becomes irrelevant with inflation" however one needs cash-flow to cover the debt in the short-medium term and expect cash-flow to be inflated also as natural side effect.

The writing is on the wall for this one, I feel property will be ok shot - long term, shares will be great opportunity in the medium term. When the ASX tumbles it will trigger millions of margin calls and then plummet the prices. In this trough would be opportunity.

Gold/Silver, it is hedged again a US dollar and anything hedged off that is poor asset IMO because the USD will be the worst affected and waters down. If you make a 50% gain on investment and the USD sinks 50% then you lost your profits.

Once again, all for comical value and am very optimistic for the future but investors shouldn't overstretch budgets, or make any predictions on expected returns or growth. The only things that should be considered are guarantees of today and personally I see this from cash-flow in property and only buying things below market value to hedge a buffer. Whether this be property or shares.

 

[Deltaberry]

Agreed. Don't be afraid of debt.

For property for example, as long as the debt generates good cashflow that well covers your interest rates, you can easily make 15%+ returns on your capital per year. Throw in currency for a kicker in the end, you'll get 30%+ when the currency moves against the A$. That's my general helicopter view. How you source these investments, where to look etc is of course for each person to discover to see what suits themselves. Any cap growth is upside, but that's where you make 500%+.

These sorts of returns are doable in Australia even now, but you don't have the currency kicker. If the currency had already crashed I'd take on debt and be fully invested in Australia. But the currency is too big a kicker to miss.

 

[Ed Barton]

Agreed. Don't be afraid of debt.

For property for example, as long as the debt generates good cashflow that well covers your interest rates, you can easily make 15%+ returns on your capital per year. Throw in currency for a kicker in the end, you'll get 30%+ when the currency moves against the A$. That's my general helicopter view. How you source these investments, where to look etc is of course for each person to discover to see what suits themselves. Any cap growth is upside, but that's where you make 500%+.

These sorts of returns are doable in Australia even now, but you don't have the currency kicker. If the currency had already crashed I'd take on debt and be fully invested in Australia. But the currency is too big a kicker to miss.

how old are you delta?

 

[JWR]

Not old enough to remember 18% interest rates obviously!

Only joking - I'm not even old enough to remember the tech crash!

 

[Sunfish]

Lizzie, You'll remember a few years ago, pre GFC, a group was trying to get approval for 0% loans here in Oz? It was a VERY hot topic here and one Lady (give the benefit of the doubt ) joined SS solely attack the proposal, clearly speaking on behalf of her employer, the establishment.

I bring this up to demonstrate how return OF capital is more important than return ON capital. Had that got off the ground and US pension funds and others were able to buy billions of dollars of prime Aus mortgage backed securities how much better off would they be now? Their paper would still be valuable and they will have pocketed a handy forex gain. Thats an awful lot better than the rubbish NINJA loans they ended up with.

I am sitting on money in the bank now because I have been made look silly before when buying dividend paying stocks, only to lose much more in cap losses. At the very least you should have a few grand in small denomination, easy recognized bullion coins. Sovereigns or Perth Mint coins where weight and purity is clearly stamped on the coin would do. Maybe a tube of Silver Eagles or some Krugerrands.

I've said it before but for the next few years, while some will make fortunes as usual, for most of us it will "He who loses least wins!"

 

[Deltaberry]

how old are you delta?

26, hope you're not going to lecture me about 18% interest rates though.

 

[Intrinsic_Value]

There are some really interesting threads popping up in the Economic sections ... some scaring the willies out of me (as designed) and left me wondering.

If all things come to pass and the world is plunged into a downturn (dragged by Europe and USA) - where should one put their money that will get a suitable IRR?

.

Honestly i am finding this environment very difficult. Its very hard to 'piece the vale' of uncertainty at the moment.

One the the main factors killing Australia is its high AU$. Great for travelling overseas, but our 'system' is not geared to such a strong currency.

Consider for a moment: minimum wages in the US are about $8per hour. In Australia its about $17.
Now when our currency is around US$0.60-$0.7, there is still a difference, but its alot more bearable. At current levels, not at all.

Wages therefore on a global scale in Australia (using US$ as the framework) have increased significantly. This has an effect on our cost structure.

This can be seen quite clearly in the international student market. International student numbers (especially new applicants) are dropping fast. Why come to Australia when you can now go to the US for a cheaper (and potentially better) education.

Likewise look at our tourism industry (not just international tourists, but the migration of local toursts to international travel).

This is now flowing through to our State Governments. In Victoria, our government has announced a 10% reduction in public servants. Why???

I spend hours every week filtering through Australian stocks. There are very few that are consistently increasing earnings in the current market (and most of those that are are priced accordingly). Then we have another group that represents 'potential value', but that is based on current information. What happens if future profit drops or drops more than currently expected, those 'potential value' stocks will become value traps (at least in the medium term).

Residential Property: i dont foresee any great crash. But nor do i see any great price appreciation potential. Individual submarkets might do well, but on an overall aggregated level, i feel things might just go up and down for a while. The real secret with residential property is the capital appreciation, not the yields. The yields are more icing on the cake after a 30 year accumulation of a portfolio of residential property (ie its the final part in a long journey).

Others have mentioned debt, yes debt can be a greate wealth facilitator, but not for all seasons, there is a time to increase debt and a time to reduce debt. Unless one is following Nathon's strategy, i dont think this is the season to go wild on a debt funded spree of property purchases.

Deltaberry also mentions debt, but he is looking at things from both a multi-asset and global point of view, his comments are not directed (in my opinion) at using debt for simple Australian residential property.

Sunfish mentions 'he who looses least wins'. If are are moving into winter, this statement could well hold very true.

For myself i am spreading the risk. Ive got some residential property, ive got australian shares, and i am attempting to increase exposure again to international large cap boring and 'safe' shares. All these positions are not set in stone.

I will try my best to adapt as circumstances update themselves. This is not the time to be an ostrich and stick ones head in the sand. Its the time to have flexible investment strategies.

 

[hobo-jo]

In my opinion debt is the best asset class.

I say that by meaning the only way we can get out of this is for inflation or print more money (globally). This will then in turn make things rise, and therefore my saying (I need to get trademarked) "Debt becomes irrelevant with inflation" however one needs cash-flow to cover the debt in the short-medium term and expect cash-flow to be inflated also as natural side effect.

Except that most new money created is debt money. e.g. "Printing money" is just expanding the amount of debt and compounding the problem.

Debt is not an asset (at least not to the borrower).

I would not be rolling the dice on a long term inflationary outcome just yet.

 

[redwing]

Agreed. Don't be afraid of debt.

For property for example, as long as the debt generates good cashflow that well covers your interest rates, you can easily make 15%+ returns on your capital per year. Throw in currency for a kicker in the end, you'll get 30%+ when the currency moves against the A$. That's my general helicopter view. How you source these investments, where to look etc is of course for each person to discover to see what suits themselves. Any cap growth is upside, but that's where you make 500%+.

These sorts of returns are doable in Australia even now, but you don't have the currency kicker. If the currency had already crashed I'd take on debt and be fully invested in Australia. But the currency is too big a kicker to miss.

Geez Delta there's some big numbers you've been kicking around of late on a few threads; enough to make one's head spin

 

[redwing]

I am sitting on money in the bank now because I have been made look silly before when buying dividend paying stocks, only to lose much more in cap losses. At the very least you should have a few grand in small denomination, easy recognized bullion coins. Sovereigns or Perth Mint coins where weight and purity is clearly stamped on the coin would do. Maybe a tube of Silver Eagles or some Krugerrands.

I've said it before but for the next few years, while some will make fortunes as usual, for most of us it will "He who loses least wins!"

In a similar situation Sunfish with our share-market portfolio, with purchasing dividend/income paying stocks, only to lose much more in cap losses than the dividends/incomes were worth (and that was with reinvesting the dividends/income).

We've still some spec stocks and blue-chips currently worth more than purchase price but the majority is sitting on the sidelines as we ponder the best move forward for the share-market portion of the portfolio

 

[Graemsay]

Banking crises are typically followed three years later by sovereign debt crises. So the current problems are right on cue.

(I believe that's one of the insights of "This Time is Different" - a paper summarising the research can be found here.)

The trouble is that governments used their ammunition in 2008, and their policy options are much more limited this time. Furthermore the markets want a solution now, particularly to something like the Eurozone crisis, whereas the political process is a lot slower. And I think that this mismatch is exacerbating the situation.

I'm not sure if I see anything as offering either a good opportunity or even a safe haven at present. Property might come out ahead after an inflationary bout, but the mismatch between (say) a 3% yield and an 18% interest rate could be painful.

Starting a company could be an option.

A number of business people have built empires during major recessions, and there's a cliché that it's the best time to be an entrepreneur. Sure it's risky, but...

 

[Aaron_C]

Everytime there's a downturn in the sharemarket, there'll be a new article in the (ironically named) Smart Investor and Australian Financial Review saying how 'cheap' stocks are. And therein people get sucked in.

 

[Deltaberry]

Geez Delta there's some big numbers you've been kicking around of late on a few threads; enough to make one's head spin

It's just a percentage. 500% of $10k is only $50k.

I'm sure nobody's spinning their head over $50k.

 

[Aaron_C]

I'm sure nobody's spinning their head over $50k.

....or are they?

 

[Deltaberry]

Hahaha!

On another note, stocks are a tough one right now because the bear market is doing what it does best: go down! So even if you perceive the stocks to be cheap in the long-term, there's probably more downside ahead so you need to be able to stomach those paper losses.

If you want fast gains, you'd have to pick an industry/company with a corporate angle. Eg if you had played coal stocks in the last year and sold every time a takeover was announced, you would've made a fortune. If your portfolio was solely coal, you should be up around 40-50% for the year. I couldn't think of many coal companies that weren't taken over or announced they had received takeover offers in 2011:

Macarthur, New Hope, Bandanna, Cockatoo, MetroCoal, Rocklands, Hunnu Coal, Coal & Allied, Riversdale Mining, Northern Energy.

 

[Edge7]

I fear my investing mojo is missing in action - or maybe it's more a case of learning more, so suffering overload paralysis from to many options.

Lizzie, maybe the answer is to do nothing at the moment. Being patient and sitting on your hands while hearing lots of market 'noise' from all sides is difficult.

If you have one cycle left (guessing 7-10 years), perhaps it is best to make 7-10 really good decisions when you are as certain as possible about the outcome.

 

[lizzie]

If you have one cycle left (guessing 7-10 years), perhaps it is best to make 7-10 really good decisions when you are as certain as possible about the outcome.

I agree ... just don't like having money sitting in the bank, even if it is earning 6%. I'd rather have my money work harder ... but it may very well be a time to sit and watch for the "eureka" moment.