Excuse me for being frank, but you can't afford to avoid the sharemarket anymore.
Let me explain why…
Incomes are being squeezed.
According to the latest national figures released yesterday, Australia is growing at its slowest pace since 1962 after adjusting for the 1.7% inflation rate.
Technically, two quarters of GDP 'growth' coming in at less than 0% is what makes a recession 'official'.
We (Australia) haven't experienced a recession since 1991. That's the second longest recession-less period ever recorded.
So are we due for one? Probably.
But whether or not we get to a full-blown recession or not (I for one hope we don't), the almost unanimous consensus among economists is that Australia is facing off with an income recession.
Now, if you're like me and sceptical of economist's forecasts, you'll probably shrug it off as needless doom saying.
After all, as the saying goes economists have predicted nine of the last two recessions.
However, the reality is the Australian economy is under the pump. The huge fall in commodity prices is beginning to take its toll on the broader economy.
For household breadwinners, slower economic growth is expected to result in lower wage growth for people like you and me.
As quoted by The Australian Financial Review, Victoria University economist, Janine Dixon, summed up the reality by saying, "GDP is growing, albeit slowly, but incomes are going down – that just shows you we're not getting much return for our effort."
Two tips for making it through
Unfortunately, a slower economy will result in lower interest rates on term deposits and bank accounts, because the central bank (known as the RBA in Australia) uses low-interest rates to stimulate growth by encouraging us to take on credit (because it's cheaper) and put our cash to use.
The problem is that interest rates are already low, and many Australians who have been, or are now, relying on fixed interest investments will be feeling the pain. For example, the big banks are offering just 2.4% interest on a one-year term deposit up to $499,999.
Even if you had that kind of money laying around in a term deposit, you'd only be making roughly $12,000 a year – $8,499 of that will be eaten up by inflation. Then, income taxes need to be accounted for.
Given the situation facing many Australians, I have two simple tips:
- Live below your means, so you can build up a rainy day fund and give yourself more flexibility to invest in opportunities as they arise. Think of your overall monthly expenses (mortgage, rent, food, fuel, dinners, phone, etc.) as a percentage of your income – and get it down whichever way you can.
- Consider buying shares in solid dividend-paying companies like Wesfarmers Ltd (ASX: WES), Woolworths Limited (ASX: WOW) and Telstra Corporation Ltd (ASX: TLS). However, remember the sharemarket is a long-term investment vehicle and it is volatile.
Whatever happens to the economy from here, one thing seems clear: You can't afford to avoid the sharemarket anymore.
