There's just a week to go until the Reserve Bank of Australia's next meeting on interest rates.
The tension is unbearable.
Apparently it's a 50/50 call on whether Glenn Stevens and his merry band of bankers will cut the cash rate to 2%, or leave it at 2.25%.
What a choice! Low or lower.
Whichever way you look at it, two things are certain…
1) Interest rates are NOT going up.
2) Interest rates are LOW, and staying low for the foreseeable future.
Glenn Stevens himself admitted as much today in a speech to theThe Australian Financial Review Banking & Wealth Summit, posing the question…
"… how will an adequate flow of income be generated for the retired community in the future, in a world in which long-term nominal returns on low-risk assets are so low?"
Do they sound like the words of a man who thinks interest rates will be increasing any time soon?
I think not.
I'm certainly betting on interest rates staying low, likely in a range of between 1.5% and 3.5% for at least the next five years.
If I'm right, getting into riskier asset classes now, and staying in them, will be the right move.
You won't catch me buying an investment property. Give me shares any day, preferably of the dividend paying variety.
If I'm wrong on interest rates, and they do break out above my 1.5% to 3.5% range, it will mean the local economy has recovered to such an extent that corporate profits are galloping along, driving stock market valuations higher.
Heads I win, tails you lose?
If only…
When it comes to investing in the share market, there's no such thing as a win-win situation.
Market corrections are a fact of an investor's life, and they ALWAYS come when you least expect them.
Not that there's any sign of such an event now. On the contrary, apparently iron ore is back in a bull market.
It doesn't take much to get the drillers and diggers excited. A jump of more than 20% in the iron ore price and they are in seventh heaven.
Never mind the minor detail that iron ore is still down around 66% from its peak, and even with a tonne of the red dirt now changing hands for $US59, the princely sum of four Australian iron ore producers are cash generative at the current price — BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and BC Iron Limited (ASX: BCI).
Over the past week, the speculators and traders have been having a field day, Fortescue shares jumping 36% and BC Iron's shares almost doubling. Every dog has its day.
Zoom out just a little, and over the past year, Fortescue shares are down more than 50%, and BC Iron's have shed a whopping 88%.
Some bull market, huh?
My colleague, Motley Fool Pro Chief Investment Advisor Joe Magyer summed up the Great Iron Ore Recovery as such…
Just as well Joe is a better investor than chartist. I mean to say, where are the Bollinger Bands, the Oscillating Beta Chords* and the scale?
Whichever way you cut it, the iron ore glut is not going away. Supply continues to increase at the same time demand continues to weaken. My bet is this so-called iron ore bull market will quickly run out of steam. Buyer beware.
Meanwhile, the bull market in Sydney and Melbourne property continues unabated, with auction clearance rates approaching 90%.
With unemployment high and the Aussie dollar stubbornly refusing to fall, the property bubble is the ONLY thing stopping the RBA cutting interest rates.
But not likely for much longer. The simple fact is with global interest rates this low, there simply has to be a bubble somewhere. It's an occupational hazard for central bankers. Safety hats optional.
In Australia, the bubble is clearly in housing, fuelled by rivers of Asian money and an abundance of cashed-up local property investors, desperate for yield, but even more desperate to rack up rental losses so they can reduce their taxable income.
Add the two Australian obsessions of rising house prices and tax minimisation together, throw a bit of unregulated property spruiking on top, and at these low interest rates, it's no wonder we're in the midst of the mother of all property bubbles.
If you've pinned your ears back, taken out a whacking big interest-only loan and paid several hundred grand for a brick box in the inner suburbs of Sydney or Melbourne, good luck to you.
Enjoy the decades of paying rates, repairs and property agents, and dealing with vacant periods and pesky tenants. Enjoy the monthly interest payments. Think of your modestly reduced tax bill as you rack up those monthly rental losses.
And hope like hell some sucker will someday buy your brick box off you for more than you paid for it.
There are better ways to make a dollar, even at these low interest rates.
They provide you with a regular income
You don't have to borrow money.
You have the very real prospect of capital growth.
You receive generous tax breaks both on the income you receive, and any capital gains you make.
And if you do happen to make a capital loss, you can offset that loss against other capital gains, including carrying losses over into future years.
I'm talking shares, in case you came down in the last shower.
They don't require maintenance, middle-men or tenants, and cost nothing to hold for as long as your heart desires.
Many of them pay you fully franked dividends. Not only do they deposit money in your bank account, you can offset the franking credit against your taxable income, thereby reducing your tax bill. Better, if you are retired, there's a good chance the taxman will send you a tax refund.
Just last week I received a dividend payment advice from Woolworths Limited(ASX: WOW), one of my family's longest held and largest holdings.
In this instance, we've chosen to reinvest the dividends back into Woolworths, not only allowing us to add to our holding in one of Australia's highest quality companies, but fulfilling our goal of regularly and consistently adding more money to the market.
Woolworths shares today trade on a forecast fully franked dividend yield of 4.7%, or 6.7% when grossed up for franking credits — not bad when the cash rate is around 2% and net rental yields on investment properties today are hovering between 1% and 2%.
Many people, especially retirees, are scared by stock market volatility.
They are scarred by the GFC, even though the market bottomed over six years ago, and when dividends are included, is trading well above its pre-GFC peak.
My solution to share market volatility is threefold…
1) Add money to the market regularly, no matter whether it's riding high or in the midst of a correction. Dollar cost averaging is one of the most effective ways you can smooth out the inevitable ups and downs of share markets.
2) Commit to staying invested in the share market for at least 3 years, preferably longer. Don't YOU be the one that sells Commonwealth Australia Bank (ASX: CBA) shares at $25, or Flight Centre Travel Group Ltd (ASX: FLT) at $4. When markets swoon, buy shares, don't sell.
3) Keep a healthy cash balance. It won't earn you much sitting in the bank, but it will help you sleep well at night, and will give you the opportunity to buy shares on the cheap if and when the market wobbles.
Until next time, as ever, I wish you happy and profitable investing.
* To my knowledge, there's no such thing as an Oscillating Beta Chord. There's also no such thing as a rich chartist. Give me good old fashioned fundamentals any day, and a long-term investing horizon.
