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What you need to know NOW about interest rates, regardless of RBA decision tomorrow

Will they or won’t the RBA cut interest rates tomorrow?

The bond market says yes — the Australian three-year bond yield has fallen to yet another record low of just 1.885%.

The currency market says yes — the Aussie dollar is now trading below US78 cents.

Peter Martin, Fairfax’s Economics Editor, says yes, his column in The Age today saying…

“Concern about deteriorating economic growth lies behind the Reserve Bank’s determination to cut interest rates, a move most likely at its first board meeting for the year on Tuesday.”

I’ve been suggesting it for a long time, even when many economists were predicting interest rates would go up in 2015. Fat chance.

Whatever happens to interest rates tomorrow, it’s totally irrelevant to you, as a stock market investor.

Here’s all you need to know…

  • Interest rates are already low, both here, and across the world.
  • Interest rates are NOT going up any time soon, both here, and across the world.
  • On the contrary, interest rates are going down, likely here, and certainly across the world, including mostly recently, Canada and Singapore.
  • Tony Abbott is unpopular.
  • Bond yields are already at record lows, both here, and across the world.
  • Property prices are at record highs here, and in many other countries across the world.
  • Gold is a shiny metal that looks good, but has no utility, and pays no dividend.

And here are your realistic investing options…

  • Leave your money in cash, earning 2% per annum, before tax. Your money is safe, but losing value courtesy of inflation.
  • Buy an investment property. Pay top dollar, earn a gross 3.5% rental yield, but pay loads of bills, pay for ongoing repairs and maintenance, deal with pesky tenants, borrow bucket loads of money, all with the express purpose of making a loss on the venture.
  • Invest in the share market. In the short-term, it can be risky. You could lose money, particularly if you “invest” in dodgy mining shares. Shares do however offer you the very real prospect of capital growth combined with a strong and growing income stream, the latter via dividends, often fully franked, meaning you ultimately pay less tax.

On the last point, look no further than JB Hi-Fi Limited (ASX: JBH). Its shares were up 4% in morning trade after the company reported strong January sales growth and increased its interim dividend by 7.3%.

It’s the best of both world’s, in action, simultaneously, and immediately. Capital growth + dividend growth = happy camper.

JB Hi-Fi shares trade on a forecast fully franked dividend yield of around 5.1%, which grosses up to 7.3% when franking credits are taken into account. Beats term deposits, rental yields and most other forms of investment.

If only the shares were less volatile, huh?

Read on below for my late mother’s solution to the “problem” of share market volatility. From very modest means, she died a wealthy woman.

Given the alternatives, it beats me why even more people are not investing in the share market.

I can think of two main reasons…

1) The fear of loss.
2) Not knowing which shares to buy, and when.

Regular readers won’t be surprised we have a solution for 2) above. Run by our own Scott Phillips (of Sky News Business and ABC’s The Business fame), it’s called Motley Fool Share Advisor, our flagship subscription-only stock picking service.

In Motley Fool Share Advisor, Scott tells you exactly which shares to buywhen to buy them, and importantly, exactly when to sell them. All that for less than $150 per year, 60% off our retail price. Click here now to jump on-board.

As for how to deal with the fear of loss from investing in the share market, I also have a solution.

It’s called “look away now.”

The pain of losing money far outweighs the high of winning. It’s why people fear the share market so much.

The share market only ever hits the front pages of the mainstream press when it falls, usually precipitously so, as it does every so often.

Share market corrections and crashes should be applauded, not feared.

Firstly, they give rational investors the opportunity to buy great companies on the cheap. Warren Buffett is an investing billionaire being a greedy buyer of shares when others are fearful.

Secondly, if it wasn’t for the occasional share market correction and the very odd share market crash, the share market wouldn’t return the 8 – 10% per annum it has done over the past 100 odd years.

If investing in the share market was less risky, everyone would do it, pushing valuations up and returns down.

Taken to the extreme, in today’s low interest rate environment, a no-risk share market would return around 2% per annum. As any term deposit investor will tell you, there’s no fun in that.

The headline…

“Thousands of ordinary Australians awoke this morning to find their investment in Commonwealth Bank of Australia (ASX: CBA) was still worth more than half a million dollars.”

… never quite makes it to the front page of the newspaper.

That headline is true. I’m not making it up.

Anyone who invested a modest sum of money in Commonwealth Bank shares back when they floated in 1991, reinvested all the dividends courtesy of the company’s dividend re-investment plan (DRP), and held all the way through to today would be sitting on an investment of greater than half a million dollars.

It happened to my parents. It happened to a friend’s parents. It happened to a number of Motley Fool Share Advisor subscribers who we met at a members-only even at the Gabba in Brisbane last year. It’s far more common than you may think.

The secret to their success is simply to…

a) Buy
b) Invest regularly
c) Hold
d) Don’t panic

My late mother’s philosophy, and the way she dealt with volatility, was to never look at the share price of any of her holdings, or indeed the overall value of her portfolio. She didn’t need the money, so it didn’t matter to her what they were worth on a day to day, month to month or even a year to year basis.

It worked a dream. Considering her very modest upbringing and her job (high school library assistant), she died a wealthy lady. Her fifth and sixth secrets?

e) Live below your means (spend less than you earn)
f) Spend on experiences (travel), not possessions.

So many investors fret the day to day movements of the markets, and the stocks within their portfolio.

If they’ve bought good companies — companies with sustainable competitive advantages and who have long growth runways ahead — paying fair prices for those companies, they fret needlessly.

It all reminds me of one of my favourite quotes…

TS 2 Feb 15

Sounds simple, right?

Buy. Hold. Get rich.

So why do some many investors utterly fail this simple test?

My guess is they want to get rich quick. They want to take a punt on some penny stock with a tall story that could turn into the next Fortescue Metals Group Limited (ASX: FMG) or the next Liquefied Natural Gas Ltd (ASX: LNG).

Here’s the problem — for the tiny, tiny number of companies that make it BIG, particularity penny mining stocks, by far the vast majority fail, taking millions upon millions of dollars of shareholder money down with them, including yours.

It’s wealth destruction on a massive scale. The rich person’s equivalent of poker machines. It’s the gambling problem Australia never hears about. Those punters piling in and out of the ASX’s latest new hot stock — medical cannabis company Phytotech Medical Ltd (ASX: PYL) — should take note. My best guess is it will ultimately end in tears.

I’ve got good and bad news.

The good news — you can stop losing money today. Stop playing the stock market’s equivalent of poker machines.

The bad news — get quick rich scheme’s don’t exist.

The really good news — you can get very rich by investing in the share market. It will take time. It will require you to invest regularly in the share market, either by adding new cash, or reinvesting dividends, or both.

Ultimately, it will be worth it.

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Of the companies mentioned above, Bruce Jackson has an interest in Commonwealth Bank.

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