The RBA meet today, with 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 Winx 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, people buying at today's record high prices and record low rental yields are taking on a huge amount of risk.
A friend of mine is a mortgage broker. Investors and developers are still falling over themselves to buy property, even though some non-bank lenders are charging interest rates approaching 10%.
Madness. Has to end in tears for those people.
I've only ever owned two investment properties.
The first was bought on a whim, thinking we were getting a bargain. All we got were bills — mortgage repayments, rates, upkeep, requests from tenants. And because it was negatively geared, we were shelling out cash every month. Not my idea of fun. We sold it after 18 months at a small loss.
The second was a unit I inherited. In the time I was managing it, I had complaints from neighbours about my tenants, disputes with the body corporate, a leaking shower, a dodgy light switch, unresponsive estate agents, and unapproved lodgers. I sold it as soon as I was legally allowed to.
I'm biased, but by comparison to property, and indeed term deposits, I think equities are a compelling bet… especially those ASX stocks paying fully franked dividends.
That's not to say shares 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 over 80% 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 Corporate Travel Management Ltd (ASX: CTD) at $6 in 2014 to lock in a profit. Today, shares in the travel services juggernaut trade at around $22.
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 borrowing a truck load of money, paying 10% interest rates, to buy an investment property at these nose-bleed prices.
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 Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), Wesfarmers Ltd (ASX: WES), Woolworths Limited (ASX: WOW) and Telstra Corporation Ltd (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 capital intensive and highly cyclical. There's one mining boom every 20-odd years, meaning the next one is some way off yet.
Both the big supermarkets have recently cut their dividends amidst price deflation.
Telstra is struggling to grow as broadband and mobile both face very competitive environments. And, an increasing number of analysts are expecting Telstra to cut its dividend.
There's a whole world of growing stocks outside the traditional blue chips.
– Companies like BWX Ltd (ASX: BWX), the company behind Sukin, Australia's leading natural skincare brand.
The company is growing quickly both here and abroad — first half export revenue grew at 115% — and the shares are reasonably priced at around 30 times earnings.
Although the BWX share price is up 30% so far in 2017, our own Scott Phillips — chief stock picker for our members-only Motley Fool Share Advisor service — still rates it a buy today.
– Companies like food and beverages company Freedom Foods Group (ASX: FNP). It too is growing quickly — revenues jumped almost 130% in its most recent half — and it also pays a fully franked dividend.
It too is an active buy recommendations for our Motley Fool Share Advisor flagship advisory newsletter service. Run by Scott Phillips, the average gain of its ASX stock recommendations is an amazing 54%, versus the All Ordinaries gain of 22%, both including dividends.
Last week, Scott named his brand new top ASX stock to buy now. This is a company with a strong brand in a niche and growing market. A market leader with global scale. An aligned management team with long-term focus. And it pays a decent fully franked dividend.
Add it all up, and this is a stock with the potential to take you a decent way towards a goal of earning a 10% per annum average rate of return. Click here now to see how you can find out its name.
This week, Scott names his top 3 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 Advisor subscribers this coming Thursday.
A diversified portfolio should have between 20 and 30 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.
