Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 100

Where to put your money these days

[Editor’s note: The author is not a licensed financial advisor, and opinions are given as a personal conviction and as a futurist, not advice to investors.]

It is getting very tricky for Australian investors with over $3.7 trillion in super and other financial assets to know which asset classes are the best in terms of short or long term yield and capital appreciation. Or safest, regardless of yield.

The choices at the asset class level are:

  • liquids (cash, short term, long bonds)
  • shares (local or foreign).
  • property (owner-occupied and investment dwellings, commercial)
  • commodities and collectables (gold, other metals, collectables)

The offshore options on any of the above classes of investment introduce the exchange rate variable, further clouding the choices. As the chart below reminds us, the exchange rate is a very difficult variable to predict with any accuracy. And buying offshore assets is not as easy with a US76¢ exchange rate versus the US$1.10 of mid-2011.

Residential property values also move around, but over the medium to longer term provided capital growth of a fairly safe 5¼% pa. However prices can go negative, as seen in the second exhibit. Australia already has some of the world’s most over-valued residential prices (over 3½ times average household income), kept high by record low mortgage rates at under 5% compared with the very long term average of nearer 7½%. So considerable care is needed as we head into the third decade of this 21st Century when it comes to looking for a lot of capital gain as distinct from low net rental returns in investment residential property.

Is gold ready for another of its spectacular leaps? As we know, gold is no longer used for currency backing, the gold standard having gone almost half a century ago when President Nixon abandoned it. These days it serves two purposes: use in jewellery and industry; and as a panic metal during financial crises. 

It doesn’t look like the price is going to spike again in the short term, but maybe in the much longer term.

Are government bonds better? Hardly, when one looks at the fourth exhibit and its record low yield in March 2015 of 2.6%.

If we think that level of yield is unacceptably low to an investor, we could spare some compassion for investors in other large economies as seen in the fifth exhibit below.

Which leads to shares. They are rising lately as much by default (unattractive yields in other classes of investment) as due to other fundamentals (rising profitability and dividends) as we see below in the sixth exhibit. So far into 2015, the All Ordinaries Index does not appear to be wildly over-trend.

The final exhibit suggests that we can over-react to steep falls such as occasioned by the GFC. The recovery across the world’s major indices ranges from the mind-boggling (NASDAQ and DAX) to sort of reasonable (All Ordinaries).

So what does all this mean going forward from 2015?

Basically, that returns are not as good as they have been over recent decades, whether they be liquids, property, commodities or shares, where rising P/E ratios are lowering yields in response to record low interest rates. Then again we aren’t experiencing another GFC either which would be a much greater worry. Inflation is very low in most developed economies, and some are experiencing deflation, not seen since the Great Depression. This points to slightly better real returns than the nominal rates might suggest.

It is also very encouraging to see the USA and UK climbing out of their six-year long GFC, although we could be less sanguine by the almost motionless Japanese economy and the slowing Chinese economy – both big export destinations for Australia, accounting for well over half our trade.

Some forecasters are predicting apocalyptic troubles arising from world debt levels, but not this author, as yet. Government indebtedness is not yet back to the immediate post WWII levels (with some exceptions such as Greece and Japan). Yes, household debt is huge in many countries, especially Australia, but still manageable in terms of debt servicing costs as our RBA reminds us from time to time, while warning us of stupid dwelling prices and the long term dangers involved.

And business debt in terms of debt/equity ratios are generally prudent.

If all this tells us anything, it is don’t retire too early! Supplement any low investment returns with working income, be it on a part-time or casual basis if you can. We will probably live longer anyway by doing that.

 

Phil Ruthven is Chairman, IBISWorld and Australia’s leading futurist. Repeating, he is not a licensed financial advisor, and opinions are given as personal conviction and as a futurist, not advice to investors. The article is written for general information and investors should seek their own professional advice.

 

RELATED ARTICLES

How much will you risk to feel comfortable?

2015 asset class review and 2016 outlook

Listed bonds finally reach retail investors

banner

Most viewed in recent weeks

10 little-known pension traps prove the value of advice

Most people entering retirement do not see a financial adviser, mainly due to cost. It's a major problem because there are small mistakes a retiree can make which are expensive and avoidable if a few tips were known.

Check eligibility for the Commonwealth Seniors Health Card

Eligibility for the Commonwealth Seniors Health Card has no asset test and a relatively high income test. It's worth checking eligibility and the benefits of qualifying to save on the cost of medications.

Hamish Douglass on why the movie hasn’t ended yet

The focus is on Magellan for its investment performance and departure of the CEO, but Douglass says the pandemic, inflation, rising rates and Middle East tensions have not played out. Vindication is always long term.

Start the year right with the 2022 Retiree Checklist

This is our annual checklist of what retirees need to be aware of in 2022. It is a long list of 25 items and not everything will apply to your situation. Run your eye over the benefits and entitlements.

At 98-years-old, Charlie Munger still delivers the one-liners

The Warren Buffett/Charlie Munger partnership is the stuff of legends, but even Charlie admits it is coming to an end ("I'm nearly dead"). He is one of the few people in investing prepared to say what he thinks.

Should I pay off the mortgage or top up my superannuation?

Depending on personal circumstances, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. Do the sums and ask these four questions to plan for your future.

Latest Updates

Investment strategies

Three ways index investing masks extra risk

There are thousands of different indexes, and they are not all diversified and broadly-based. Watch for concentration risk in sectors and companies, and know the underlying assets in case liquidity is needed.

Investment strategies

Will 2022 be the year for quality companies?

It is easy to feel like an investing genius over the last 10 years, with most asset classes making wonderful gains. But if there's a setback, companies like Reece, ARB, Cochlear, REA Group and CSL will recover best.

Shares

2022 outlook: buy a raincoat but don't put it on yet

In the 11th year of a bull market, near the end of the cycle, some type of correction is likely. Underneath is solid, healthy and underpinned by strong earnings growth, but there's less room for mistakes.

Gold

Time to give up on gold?

In 2021, the gold price failed to sustain its strong rise since 2018, although it recovered after early losses. But where does gold sit in a world of inflation, rising rates and a competitor like Bitcoin?

Investment strategies

Global leaders reveal surprises of 2021, challenges for 2022

In a sentence or two, global experts across many fields are asked to summarise the biggest surprise of 2021, and enduring challenges into 2022. It's a short and sweet view of the changes we are all facing.

Shares

What were the big stockmarket listings in record 2021?

In 2021, sharemarket gains supported record levels of capital raisings and IPOs in Australia. The range of deals listed here shows the maturity of the local market in providing equity capital.

Economy

Let 'er rip: how high can debt-to-GDP ratios soar?

Governments and investors have been complacent about the build up of debt, but at some level, a ceiling exists. Are we near yet? Trouble is brewing, especially in the eurozone and emerging countries.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.