In This Issue
If you hear the sound of hooves, it is smarter to expect horses than zebras
One of our newer clients, a Queensland based trainee-anaesthetist, shared this quote, which was an essential part of his med-school drill. It is essentially a reminder to rely on your training and experience, rather than jumping to colourful conclusions. I thought it was very apt; perhaps many of our over-excited media commentators should adopt it!
Nevertheless, it is my view that Australia is facing two or more quarters of negative growth due to the blunt instrument of interest rate rises. That’s why we should expect a recession, soon. I hear the hooves of the market coming at us at full canter. I hope I am wrong, but only time will tell.
Many economists (despite this month’s pause) still predict further interest rate rises before easing in 2024 or 2025– and this is a massive pull on the economic reins, increasing the annual cost to average home borrowers of almost $20,000 pa, already. Unfortunately, there are many borrowers who face being pushed over the rails.
The problem with reducing consumption by increasing the cost of borrowing is that one hundred per cent of the real pain falls on just 25% of the population. As a solution, it is inequitable. A far fairer approach would be a GST increase of 10%, with compensation built in for those below the minimum wage. This strategy would reverse the pain percentage and spread it across all consumption. Unfortunately, it is politically unpalatable, and therefore politically impossible.
So, that begs the question, ‘what should I do?’
The smart thing for Marinis clients is to do nothing, but importantly, don’t panic.
Long term wealth is grown by ‘staying in the saddle’ and riding out the bumps. In fact, downturns and recessions can be a very effective way to grow wealth by continuing to buy discounted assets, if you are in the accumulation phase.
If you are in the draw-down phase, I always recommend an investment buffer in cash of around two years income. Yes, this buffer underperforms against the stock market, but it provides a shock absorber for investors. It means you don’t have to sell assets at discount prices to be able to eat.
Many people over the age of 50 will be more comfortable with a conservative investment profile that allows them to continue to accumulate wealth and ride out the shocks. As regular readers will know, I am a disciple of journalist Edna Carew’s philosophy of “getting rich slowly and staying rich”.
I also advise investors to plan for a return of around 5% per annum. The norm is around 6% – 7%, but the 2% gap also helps considerably to buffer the downtimes.
Recessions are not the end of the world; just as high inflation doesn’t mean the end of investing. They are both part of a normal cycle of boom and bust that should not spook anyone unless they are exposed to get-rich-quick schemes.
History tells us the stock market is the best way to transfer wealth from the greedy to the patient.
And One More Thing:
If you, or a member of your inner circle are feeling the economic ‘bridle’ pinch, feel free to get in touch with us for advice on riding out the upcoming storm. Times may be tough for the over exposed.
If you would like to read my latest contribution to the national long-term savings debate, please click here.
As always, if I or any of the staff can be of assistance, please don’t hesitate to contact us on (08) 8130 5130 or via email@example.com
Theo Marinis CFP®, B.A., B.Ec., CPA., MCIFAA