Take a look at what just a 10% per annum return can do for your SMSF

The RBA meet today, with new governor Philip Lowe widely expected to keep interest rates on hold at just 1.5%.

It’s as close to a sure thing as a Black Caviar win. The economy is growing slowly. Wages are virtually stagnant. The stock market has been going nowhere. Heck, even property price gains have slowed.

Speaking of property prices, as our own Mike King reported, those people who think house prices can only go up might want to think again.

According to CoreLogic RP Data’s latest Pain & Gain report, more than half the properties in Central Perth (53%) sold at a loss in the June 2016 quarter, losing on average $60,000 per property – with the area dominated by apartments.

That’s one way to set money on fire.

This coincides with a report released by Credit Suisse which, according to Fairfax’s Adele Ferguson, says “SMSFs have become attracted to the double-digit returns on offer from residential developer mezzanine debt and senior preferred equity.”

Whenever you see the words “double-digit returns” and “debt,” I strongly suggest you head for the hills.

Run even faster when you see that mezzanine debt providers are offering returns of between 15% and 20%. My bet is you’ll end up blowing all your money, and maybe even more.

When something looks too good to be true, it almost certainly is. And in this low interest rate environment, anything returning above even 5% involves taking on a level of risk.

And that includes buying plain old vanilla investment properties.

No matter what the property spruikers might promise — and such promises usually start with the line “property prices never fall” — people buying at today’s record high prices and record low rental yields are taking on a huge amount of risk.

And that’s without mezzanine debt.

Ask how recent investors in the Central Perth market are travelling. Not to mention regional Western Australia, where 34% of homes sold in the June 2016 quarter did so at a loss.

Still, it’s all plain sailing in Sydney, where just 2.4% of properties were sold at a loss in the same period, and Melbourne where just 4.4% of those sold did so at a loss.

So far, at least.

With a record amount of property currently under construction, and the government cracking down on foreign ownership, and the banks tightening lending, and the Chinese government attempting to restrict capital outflows, and low population growth, and first home buyers being priced out of the market, and stagnant wage growth, it seems inevitable that supply will soon exceed demand.

Economics 101 says when that happens, property prices will fall.

Of course, not all property markets are created equal. While Perth falls, Sydney flies. While the eastern suburbs stagnates, the west rolls higher.

If you haven’t worked it out by now, I’m not a property investor. Too many variables. Too much hassle. Debt. Tenants. Bills. Maintenance. Estate agents.

I’m biased, but by comparison to property, and indeed term deposits, equities are a compelling bet… especially those ASX stocks paying fully franked dividends.

That’s not to say they are without risk.

You can lose some or all of your money… especially when you plonk some of your hard-earned down on speculative penny share mining stocks.

When share markets have their inevitable bouts of volatility, you can get scared out of the market, selling at the worst possible time.

Ask anyone who sold out in March 2009 — when the S&P/ASX 200 Index slumped as low as 3145 — how that one worked out. Since then, the market has jumped almost 75% higher, not including dividends.

When it comes to their commitment and expected returns, both novice and experienced property investors alike take a long term perspective.

But when it comes to the stock market, many novice investors focus almost exclusively on the day to day movement of individual share prices.

They judge the success — or not — of their investment over a period of days and weeks, not over years and decades.

They sell shares too quickly, either when the share price is falling, often for no obvious reason, or to lock in some profits, often selling way too early.

There are few bigger mistakes than selling too early. Just ask the person who sold Bellamy’s Australia (ASX: BAL) at $3.50 to lock in a profit. Today, shares in the milk formula juggernaut trade at close to $13.

With stock market investing, it pays to sit back and look at the big picture.

Called the Rule of 72, by dividing 72 by your expected annual rate of return, investors can get a rough estimate of how many years it will take for their initial investment to double.

For example, if you expect the stock market to gain 7% per annum, it will take about 10 years (72 divided by 7% = 10.29 years) for you to double your money.

In this low-interest rate environment, a 7% annual rate of return is pretty decent, and probably about the best you can expect, especially if your portfolio is chock full of large cap ASX blue chip stocks.

Here at The Motley Fool, we’re not satisfied with the returns of the market-at-large.

And, greedily, I’m not satisfied with doubling my money every 10 years. I’d like to double it at least every 7 years, something that requires a 10% (72 dividend by 10% = 7.2 years) annual rate of return.

Let’s say you retire at 65 with a $700,000 balance in your SMSF. And let’s say you withdraw 7% of your balance each year. If your money is growing at 10% per annum, by age 80, even after withdrawing money each year, your SMSF balance will be $1 million.

Amazing what a long-term focus can look like, huh? And amazing what a 10% annual rate of return can do for you.

Of course, there are no guarantees, although the more you put time in your favour, the better your odds of success.

And make no mistake, even though 10% is about the long-term historical average rate of return from the stock market, we’ve never before had interest rates this low. It won’t be easy. And it will require skill and patience.

So… to the million dollar question…

How do you return 10% per annum, on average, over the long-term?

Not by punting on some residential developer mezzanine debt scheme.

Not by punting on speculative mining stocks.

And probably not — believe it or not — having a portfolio made up exclusively of the big four banks, BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO),Wesfarmers (ASX: WES), Woolworths (ASX: WOW) and Telstra (ASX: TLS).

For starters, it’s not a diversified portfolio.

With property prices so high, the big four banks all carry a fair degree of risk.

The big miners are dealing with the end of the mining boom and an over-supply of global commodities, including iron ore.

Both the big supermarkets have recently cut their dividends amidst price deflation.

And Telstra is struggling to grow as broadband and mobile both face very competitive environments.

There’s a whole world of growing stocks outside the traditional blue chips.

Companies like Retail Food Group (ASX: RFG), the master franchiser and owner of the Brumby’s, Gloria Jeans, Donut King and Crust Pizza brands, amongst others. The company is growing like gangbusters, and paying a growing fully franked dividend. Since Scott Phillips first recommended the stock as a buy to Motley Fool Share Advisor members, including dividends, it has soared over 225%.

Companies like food and beverages company Freedom Foods Group (ASX: FNP). It too is growing quickly, and also pays a fully franked dividend.

Both are still active buy recommendations for our Motley Fool Share Advisorflagship advisory newsletter service. Run by Scott Phillips, the average gain of its ASX stock recommendations is an amazing 61%, versus the All Ordinaries gain of 17.6%, both including dividends.

Last week, Scott named his top 5 dividend stocks taken from the Motley Fool Share Advisor scorecard. With an average yield of 5.4% — which grosses up to over 7.5% when franking credits are included — such a portfolio instantly takes you a decent way towards a goal of earning a 10% per annum average rate of return.

This week, Scott names his top 3 growth stocks taken from the Motley Fool Share Advisor scorecard in a special “Best Buys Now” report. The names of the companies will be emailed exclusively to Motley Fool Share Advisorsubscribers this coming Thursday.

A diversified portfolio should have between 20 and 50 individual positions. Build them up over time. Add at least one new position, or add to one of your existing positions, every single month. Where you can, reinvest your dividends.

Slow and steady wins the investing race.

But you have to be in the race to win it. And the sooner you start your journey, the better.

Aged 80 and to still have $1 million in your SMSF is fantastic. Having even more, earlier in life, is wealth nirvana.



Of the stocks mentioned, Motley Fool General Manager Bruce Jackson has positions in Bellamy's Australia, Retail Food Group, BHP Billiton and Telstra. The Motley Fool Australia owns shares of Bellamy's Australia and Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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