Don't look now, savers and retirees…
"The Reserve Bank of Australia is confronting the prospect of having to make multiple official interest rate cuts, taking the official cash rate below 2 per cent in coming months, on a worsening iron ore collapse."
Just when you thought this low interest rate environment couldn't possibly get any worse, an AFR article today not only suggests the RBA could move as early as next week to cut interest rates, but the cash rate could fall below 2% before the year is out.
Happy Easter, savers and retirees.
In case there was any doubt, low interest rates are here, and here to stay, for the long-term. Set your expectations, and position your share portfolio accordingly.
Getting in ahead of the upcoming RBA meeting is ING Direct, placing this notice on page 17 of today's Australian Financial Review…
You can't hide from me, ING.
On the bright side, and not surprisingly, the ASX has jumped higher today, surging 80 points to 5,925.
The formula is simple — interest rates down, share markets up.
If you remember back to February, in the wake of the RBA's interest rate cut, the ASX surged 82 points, closing at a then near seven year high.
History suggests the same might happen next Tuesday. It could even be the day the S&P/ASX 200 Index finally surges back through 6,000…
I'm getting in ahead of the game, late last week making my latest purchase of one of the stock recommendations Andrew Page has made to subscribers of our Motley Fool Dividend Investor stock-picking service. As it says on the tin, Andrew picks high yielding ASX stocks.
On Saturday, you may have read about how I was sitting on an $18,000 real money profit by investing in one of Andrew's share tips.
In late January, I even posted details of my initial trade on the Motley Fool Dividend Investor subscriber-only discussion boards…
Happy days for me, and presumably for thousands of Andrew's loyal Motley Fool Dividend Investor subscribers. As of last Friday, my initial $15,000 investment had turned into a whopping $33,000.
With a record like that, it's perhaps no wonder I'm back trying for more big gains. The Motley Fool Dividend Investor recommended stock I bought last week trades on a forecast fully franked dividend yield of 5.5%, which grosses up to a rather attractive 7.9% when franking credits are taken into account.
Take that, ING Direct, with your 1.25% Savings Maximiser interest rate. Savings Minimiser more like it…
Still, as a punter, you can take it or leave it. No-one's forcing you to stay in cash, or indeed forcing you to keep your money parked at one financial institution over another. Shop around, by all means…
That said, don't expect fireworks. I have the majority of my cash parked at UBank and Rabobank, for what it's worth, which isn't much when it comes to earning interest.
Such is an investor's lot. In this low interest rate environment, here are your options…
- Keep your money safe in the bank. Look at it adoringly, and remember back to the "good old days" when you used to earn a risk-free 7% interest rate. Those were the days…
- Buy an investment property. Pay a small fortune in stamp duty, rates, repairs, estate agent fees, interest and maintenance. Deal with pesky tenants and their requests to hammer a nail in the toilet door to hang a picture. Earn a gross rental yield of 3.5%. Make a real loss on the 'investment' all in the name of negative gearing, in the hope property prices will go from over-valued to totally unaffordable. Completely, and utterly bonkers.
- Buy whiskey and fine wine. Drink it. Cheers.
- Invest in the share market. Diversify away from the big four banks, supermarkets and Telstra Corporation Ltd (ASX: TLS). Set yourself up for a potential tax refund by investing in companies paying fully franked dividends. Don't sweat the day to day stock market volatility. Keep cash on the sidelines so you don't have to fear a share market market crash. Invest regularly. Reinvest your dividends.
- Buy gold. Wear it as jewellery. Admire it for its beauty. It is not a sane form of investment.
- Buy iron ore miners or oil producers. See you in the poor house.
If you are reading this, and I've managed to keep you engaged this long, you're likely already a share market investor.
Congratulations.
Your biggest challenges NOW are mental.
1) You fear the government meddling with superannuation rules, removing some of the more generous tax breaks afforded the wealthy.
So what do you do?
Do you freeze up for the next two years while politicians and bureaucrats talk about what might happen to the superannuation rules?
Or do you stay calm and carry on, dealing with any consequences later?
Put me firmly in the latter group. I'm not waiting around to see what politicians might do to my superannuation, and when. Life is too short.
2) You fear the government abolishing dividend imputation, or franking credits.
Mark my words. Politicians of both sides are most certainly NOT going to go down in history as the people and party who caused a share market crash. What they might take away in franking credits, they WILL give back elsewhere.
If I were a betting man, my guess would be franking credits would be lower down the list of possible tax reforms, behind GST, superannuation and negative gearing.
Those three are enough for any political party to chew off in the next few years, not to mention the small point of balancing the budget and being re-elected or elected. We all vote.
If you haven't worked it out by now, I'm plumping for equities.
I'm buying dividend paying stocks that have strong growth prospects, exactly the types of companies Andrew Page chooses for subscribers to his Motley Fool Dividend Investor newsletter service.
I'm buying US-quoted shares, taking advantage of the growth opportunities on offer from the one of the world's fastest growing economies, and the still weakening Aussie dollar.
And I'm doing nothing.
In this game — the game of investing — you make most of your money sitting back and letting the passage of time, and the miracle of compound returns, do their thing.
Try it some day. Ask someone who bought shares when Commonwealth Bank of Australia (ASX: CBA) floated back in 1991, who reinvested their dividends, and held all the way through to today. Their holding will be worth close to $1 million, at a minimum. Don't believe me? Check your share certificate, or that of your parents. You'll be pleasantly surprised.
On a total returns basis, including dividends, over the last 100 years, Australia has had one of the world's best performing share markets. It has prevailed through wars, share market crashes, house price corrections, depression, corrections, recessions, Labor, Liberal, Gorton, Whitlam, legislation, regulation, taxes, reforms…
Will this time be different? I doubt it.
