The future of wealth creation

The model of wealth creation I was taught as a kid was simple; study hard, get a good job, save your money. Straightforward. But completely ineffective. This ‘philosophy’ goes a long way toward explaining why many people of my generation spend their life buried in debt, working in an unfulfilling job and wishing they would win lotto and escape. No strategy, no advice, no mentors and no support makes it almost impossible.

But what about now? With access to so much information, it should be easier to chart a course to financial wellbeing, but much of that information is inaccurate or unhelpful and confusing. As a result, there is a greater willingness to seek advice. As advisors however, we have to realise that priorities have shifted. The “work hard, save your money” approach has been replaced with work hard, travel extensively, enjoy experiences, be open to change and new opportunities.

So, wealth creation strategies have to incorporate new levels of flexibility. They have to allow for more career changes – potentially across multiple states or countries, more liquidity to enable quick changes of direction and more cash flow to facilitate lifestyle choices.

The end goal is the same, but the game has changed.

 

Words by John Di Natale. John is a Managing Director of Equi Wealth. He is an international speaker, wealth creation specialist, financial planner and licensed estate agent.

Am I putting property on a pedestal?

“What’s the best thing to invest in?” “Well, it depends…”

That’s not the cop-out answer it first appears to be. It really does depend. Helping our clients develop their investment strategy, choose investments and manage them is a key part of what we do.

Of course, there are lots of investment options and there’s no absolute right or wrong. There are good investments, there are better ones and there are worse ones. You could invest in shares, or bonds, or options, or bitcoin or a dozen other things.

 

I’m happy to put my bias on the table.
I think property – specifically residential property
should be the foundation of your investment portfolio.

 

Why? Well, let me give you a few reasons.

One. Most people understand property to a reasonable level. It’s the one investment class that most people will get involved in at some stage over the course of their life. Those of us fortunate enough to buy our own home or buy an investment property will have at least a basic understanding of finance, capital growth, perhaps leverage and the buying and selling process.

Two. It’s relatively easy to understand the fundamentals that drive the growth of property values. Population growth, demand for housing, proximity to services and amenities such as transport, schools, shopping centres, cafes and entertainment.

Three. Perhaps most importantly, residential property is the best performing asset class over the last 10 years.* In fact, bricks and mortar has produced an average annual compound return of 8.1% That’s taking into account the total returns from the assets including increases in value and income such as rent and dividends for shares. And that’s across all the major capital cities in Australia. Most likely, if your property is in Melbourne or Sydney, you’ve done better than that.

What’s surprising is that Australian shares produced an average annual compound return of 4.3% over the 10 years. Global shares did slightly better at 5.5% and Australian bonds returned 6.1%.

Yes, I know this is not the whole story… We have to take tax into account and how much actually ends up in the owner’s or investor’s pocket will depend on their marginal tax rate, whether the assets are owned inside or outside superannuation or other structures, income distributions etc.

BUT, this is a big tick for making sure that you get into property and make it a key part of your investment portfolio.

Four. Banks like property. There is no other asset class that is as well regarded by the banking sector when it comes to leveraging for finance. That means you can utilise equity to a greater extent to secure other investments or raise money for whatever else you happen to be doing.

So, when people ask me what’s the best thing to invest in, my go-to answer is still property.

*The reference to property being the best performing asset class is based on the 2017 Russell Investments/ASX Long Term Investing Report.

When “buy and hold” is not all its cracked up to be

We’ve all heard it many times. The best thing to do is to buy property and never sell. The last time I heard it, Warren Buffet was quoted as saying his favourite investment term is forever, but is that actually a good strategy for us mere mortals?

Well, like most things, it depends…

Buying and holding a quality property asset that generates income and increases in capital value over time is certainly not a bad thing. What’s important in making the decision to sell or not sell is the motivation for doing so.

One of the most common reasons touted for not selling is avoiding tax, specifically, capital gains tax. Of course, part of any wealth creation strategy is the minimisation of tax, but if avoiding tax causes you to hold onto a poorly performing asset, what’s the point? As investors, it’s important to come to terms with tax so we’re making decisions for the right reasons. Tax is simply a cost of generating income, perhaps best thought about in the same way we think about rent or salaries or marketing costs – necessary for getting the job done.

If “buy and hold” is not the right strategy in every circumstance, the next question we should ask ourselves is, when should we sell. In almost every other asset class, having an exit strategy is one of the key elements to success; knowing the price point at which you’ll sell your shares for instance. Why should it be different with property?

Here are a few thoughts to help guide your decision-making.

Are you letting your emotions rule?

Investing is based on logic – or at least that’s the theory – but most of us find it difficult to totally remove emotion from our decisions. Sometimes our investments have personal significance; they’re in the neighbourhood where we grew up, or are close to where we live… and we let those factors affect our decision making instead of growth, rental yield and tax effectiveness. As much as possible, try to take the emotion out of the important decisions, like when to sell.

Does the investment fit your strategy and your risk tolerance level?

Buy and hold is an investment strategy, but certainly not the only one. It’s a strategy that may be appropriate if your plan is for long-term growth with relatively low risk (assuming you have selected a fundamentally good asset of course). Some strategies depend on buying and selling and getting the benefit of increased value. Renovating, buying and flipping and the like would obviously fall into this category. Your strategy needs to be appropriate for the type of asset and aligned with your overall objectives.

Each approach carries with it a degree of risk. Having a good understanding of the type of risk and the level of risk you are prepared to tolerate is an important part of the discipline of investing. There’s no point chasing big returns if the added risk is going to give you a heart attack!

Be careful not to get “Investor’s A.D.D.”

Successful investing is a sometimes tricky balance between being patient and having the courage to act when you should. Some investments grow more slowly than others, but that doesn’t necessarily make them a bad investment. If you work on the basis that there is always a better opportunity elsewhere, you will constantly be buying and selling, incurring cost, paying tax and potentially missing out on long term growth. Setting your benchmark and ensuring that each investment is performing at that level in its own right is better than constantly comparing, chopping and changing depending on what’s “big” this week.

That’s not to say you should never sell. Sometimes you just have to make the decision and move on to other, better opportunities. There are many situations where selling is in fact, the smartest move. If you have a property in an area that is not showing any growth over an extended for period instance, or if you geared too highly and the cashflow is hurting, perhaps you bought an older property and the maintenance costs are getting too high, or you were convinced by someone (as often happens) that you were buying in a “boom” area, but the boom just hasn’t happened… This last one by the way, usually coincides with paying too much for the property in the hope that it will go up in value quickly or achieve super high rent.

Whatever the reason, holding on and just hoping for things to improve is NOT a good strategy. Any good investor knows that it is sometimes better to make a decision, sell and move on to better opportunities elsewhere. There’s a place for loyalty; hanging on to a bad investment is not that place.

From a cost perspective, agents’ commission and marketing spend are the two big ones when selling. These could amount to somewhere between 2 and 4 percent of the sale price depending on where you happen to be and whose services you choose to employ. On a big sale, that can be a sizeable amount and our instincts will naturally tell us to avoid it, but what about the opportunity cost? Having your capital tied up in a poorly performing asset is depriving you of the returns that same capital could generate in a better asset. The longer you wait, the greater the opportunity cost becomes. In my experience, most successful investors are decisive. They don’t take months to think about selling; they sell and move on to a better investment.

Finally, keep a close watch on the market and the performance of your investments; our review cycle for example, includes a full portfolio and strategy review every 6 months as a minimum. Monitor the relevant indicators of performance (I’ll talk about these in detail in my next article) and have an exit strategy you can activate when the signs point that way.

John Di Natale is a Director of Equi Wealth. He is an international speaker, wealth creation specialist, financial planner and licensed estate agent.

Popping the housing bubbles bubble

Apparently we’re in “the grip of a housing bubble”. If your bits have been feeling a little errr, constricted, this could be the explanation.

What is a housing bubble anyway? In high school they told me it’s always good to start with a definition, so here’s mine:

Housing Bubble (def): Device for driving traffic to media websites, catch-cry of the week for economists and property commentators, mythical object only seen by the eyes of a blind virgin on a full moon.

I’ve been doing quite a bit of reading and here’s what I’ve learned about the bubble – not much. Economists and experts can’t agree on how to define a housing bubble, let alone whether or not we’re in the grip of one. Nor can they agree on what the implications of the bubble might be for homebuyers, first homebuyers, investors, downsizers, developers, the banks and government revenue.

So, what is this thing called a housing bubble? The best definition I can find is that its simply when property prices reach a level that can no longer be sustained and they drop to a lower benchmark. Of course there is no agreement on what that lower benchmark should or will be and whether that drop will have any flow-on effect or even go on to become a fully-fledged recession. This rise, a slight drop and then rise again is what property prices have been doing at pretty regular intervals for the past hundred years or so. I’d say that’s a market correction, rather than a bubble and its influenced by factors other than price – like population growth, household income, savings levels, tax policy, buying psychology and many others.

If you want to talk about a bubble, you could perhaps point to mining towns where property prices were pushed to ridiculous levels and then “popped” when the mining companies pulled up stumps and left town. If you’re an investor, there’s an important lesson there about “hotspots” vs. good investing fundamentals, but that’s a discussion for another time.

Interestingly, the chief executives of National Australia Bank, Westpac and Commonwealth bank, testifying at a parliamentary inquiry into banking this week, said that while they have some concerns about aspects of the housing market, they don’t believe prices are over inflated. Read, there is no bubble. Rather they claim, the higher prices are supported by the fundamentals.

Bubble or no bubble, about to pop or not, the fundamentals should continue to be the major drivers in your purchasing and investing decision-making.

Life is for living. All the best on your investing journey!

Frog in a saucepan

You’ve probably heard the story about a frog in a saucepan filled with water. Take that saucepan, put it on the stove and the frog will happily sit there as the temperature rises until the poor frog is boiled – literally. Why would that happen? Apparently, because a frog is cold blooded and its body temperature adjusts to its surroundings, it doesn’t notice the ever-increasing water temperature – until it’s too late!

I had an alternate title in mind for this piece. It was: What’s your bullshit story? You’ll see why I was planning on calling it that below.

Then I stumbled across the frog in a saucepan analogy again, which explains in a unique way the outcomes of the bullshit we tell ourselves.

Why am I talking about boiled frogs?

Well, because some people are just like the frog. Things start out OK. You’re working, you’re making some money and you’re feeling pretty good about things.

And then the temperature starts to rise. Life starts to wear you down, as it tends to do. Before long, you find yourself settling for “reality” rather than aspiring and working towards your goals. You settle for not renovating your home this year, not going on holidays, not sending your kids to the school you really wanted them to go to. You settle for expensive credit card debt as a fact of life, overdrafts, borrowing from your family…

You’re now the proverbial frog, sitting in the saucepan seemingly oblivious to the fact that your situation is heating up. So what do you do? Here are a few possible scenarios:

  1. Do nothing
    This is in fact what most people do. Perhaps not the best option because you pretty much end up “cooked”.
  2. Settle for “reality”
    Explain the increasing level of pain you are experiencing with phrases like “oh well, what can you do?” and “that’s just the way it is”.
  3. Look outside the saucepan
    You may be surprised to discover that you’re not the only frog and your “reality” is not everyone’s reality. There are other frogs out there; like the one sitting on a lily pad, wearing sunnies and sipping on a drink with a little paper umbrella in it.
  4. Do what frogs do best – jump!
    Get out of the saucepan and get a clear perspective on things. Have a critical look at how you got into the saucepan in the first place and how you can avoid ending up there again – or at least turn down the heat.

I hope the frog in a saucepan analogy hasn’t confused you. Here’s what I really want to say in simple terms: most people are not fully aware of their financial situation – both in terms of the things that are hurting them and costing money and the opportunities that could make them significant amounts of money.

So, I suggest you “jump”. Get clear on your situation and how to improve it. Get professional advice. Develop a strategy. Make it happen and get out of the saucepan forever.