I was asked a pretty good question over the weekend: "With so much uncertainty around the economy, what should I do?"
Now, long-time readers will know my response to volatility is generally to shrug my shoulders and plough on with the same investment strategy. After all, if you let volatility put you off, you'd never invest.
More bluntly: Investing is all about risk. The very reason we are able to earn good returns is the uncertainty present in buying shares of businesses.
So, that's the usual answer. Usual, because it's both accurate and (hopefully) useful.
The sooner you make peace with volatility, uncertainty, risk and, occasional losses, the better off you'll be.
But this time was different. At least a little.
The question wasn't just about the usual uncertainty, but the uncertainty that surrounds elections. And more specifically, the potential for policy changes, should we have a change of government.
I've written about my views on the proposals. I've tried to reach out to the politicians, but so far, no good.
We'll keep trying, but in the meantime, what is an investor to do?
Firstly, let's look at the details:
The current Labor policies are to halve the discount on capital gains, restrict negative gearing on property to new dwellings ('off the plan'), and to ban the refund of franking credits.
We don't yet know when those changes will come into effect. Labor's policy outline on the party's website talks of 'future' dates. So, unless they decide to make the changes retroactive, it's reasonable to assume that any changes happen post-election.
Which means that, should we be so inclined, investors have the opportunity to set up their portfolios in advance.
But not so fast. You see, as my grandmother might have said, there's often a slip 'twixt the cup and the lip.
First, Labor may not win the election. Yes, they're the favourites with the bookies, but that doesn't mean they'll win. There's plenty of time for fortunes to change between now and election day.
Second, Labor may either change its mind on some or all of those policies, or simply decide not to implement them.
Third, it might decide to delay them (which I think it should do with negative gearing, at least, given the state of the housing market, and the risk that any further disruption might flow on to the physical economy in unwelcome ways).
And last, it may try to legislate the changes, only to be blocked in the House of Representatives or, more likely, in the Senate. Certainly, some cross-benchers have expressed concern about some of the proposals.
So what to do?
It will all look obvious in hindsight, of course — such is the way of these things.
The most obvious choice is to accelerate our purchases. In this scenario, buying assets that remain eligible for negative gearing or the current capital gains tax discount (of 50%) seems pretty smart. After all, we'll effectively pay 50% more tax on our gains after any changes take effect, and/or lose the significant cash flow benefit of negative gearing.
A dollar invested on the day before any changes is simply worth meaningfully more than afterwards.
Unless it's not.
No, I'm not hedging my bets here, but be careful: if everyone takes the same view, the rush of buying could actually increase asset prices. If you end up paying more because of the changes, that 'premium' might meaningfully eat into any benefit of acting straight away.
And, of course, any cash committed now can't be used in future, should an even better deal come up. (Yes, you can sell, and re-buy, but there's time and frictional costs — not to mention psychological biases — that make such a plan difficult.).
All else being equal — which it's not — there's a strong theoretical case for bringing forward any investment decisions, as long as those decisions are grounded in sensible analysis, and not by good old FOMO — the fear of missing out.
It's too easy to get caught up in the rush. And God knows, Australians will just about kill for a tax deduction, when what should matter isn't how little tax you pay, but how much money you make, after tax.
Don't believe me? Ask yourself: When was the last time you asked your accountant 'How can I maximise my after-tax return?', rather than 'How can I pay less tax?'.
Here's what I'd do (and everyone's situation is different, so, as always, seek personal advice):
If I had money laying around that I was planning to invest, I'd have a bias to investing it before the election. Note that I didn't say I would definitely do it. Just that my I would have a bias towards it.
That is, if I was presented with an opportunity to make an investment, and I was weighing it up, the opportunity to do so before the election would lend some weight to the 'pro' column.
It's not enough to turn a bad investment into a good one. It won't turn a mediocre idea into one you should chase, either.
But all things being equal — or even roughly equal — buying before the election should deliver meaningfully better results, after tax, than waiting until after it.
Fool on!
Scott Phillips
Chief Investment Officer
Motley Fool Australia
