It’s been a turbulent start to 2016 with share markets crashing all over the world. It was a major topic of conversation at a recent dinner party I attended, with one guest summing up the mood of many others by declaring: “We like to sleep at night – that’s why we don’t have any shares”.
On the face of it, it’s a reasonable attitude given the present parlous state of the markets, but the reaction from some of us was that we couldn’t sleep at night if we didn’t own shares.
Now it can be a good feeling to have cash in the bank, especially when you can get a safe 2.5% as you can right now, but the problem with cash is that it has no tax benefits, gives you no chance of any capital gain and is eroded by inflation. A return of $2500 on a deposit of $100,000 may sound risk free, but take off 3.0% for inflation and you are left with a negative return.
This leaves us with the good old faithfuls – property and shares. It’s important to have an interest in both these camps, but it’s just as important to understand that they behave in very different ways. It’s highly unlikely that your property will lose 30% of its value in a downturn, but if there are ongoing costs it can be a long drawn out process if you ever try to sell it.
Shares will give you a much more exciting ride because their values will bounce around, but their big advantage is that you can buy and sell in small parcels; they provide tax advantaged income by way of franked dividends; and over the long term have been the best performing asset class of all – an average of 8.3% per annum over the last 15 years even after taking the present slump into account.
The problem with shares is that they generate great newspaper headlines. Have you noticed the media reports falls in billions, and reports rises in points. For example, $100 billion wiped off the market today – market up 50 points.
You also need to appreciate the difference between traders and investors. Traders try to profit by picking the short-term movements in the market and buying and selling accordingly. But investors – and that means most people – take the long-term view. They ride out the falls and enjoy the increases over time.
Unfortunately the average Aussie has a strange approach to investment. When a stock market boom has become well established they love to jump in and buy up big because they believe the boom is never going to end. When the market has one of its inevitable downturns (as it is doing now) they stay away in droves, or worse still, sell out at the worst possible time. All this does is turn a paper loss into a real one.
Now let’s get back to the “sleeping at night” bit. Think about a person aged 65, who has $800,000 in super and wants to draw $55,000 a year. If their fund is diversified enough to earn 8% per annum, their money will last to age 90 if inflation averages three percent per annum. However, if they are scared of shares and opt for a “safe” 2.5% return, their money will be gone at 78. In an age where many retirees can expect to live to 90, that’s a thought to keep anyone awake at night.