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The world of investing is changing

The world of investing has changed. It has been changing for the last forty years. Interest rates have been on a slow decline and we’ve seen asset prices grow ever higher. The value of shares, property (both commercial and residential) and infrastructure have all increased substantially.

But now, with global interest rates effectively at zero, what’s happening? What’s next?

A key investing principle states that the lower interest rates go, the higher asset prices rise.

But what happens when interest rates can fall no further? With interest rates at zero percent and in some countries negative, what happens next to stabilise economies, shares, and property alike.

The fire continues to burn under assets like shares and property by central banks continuing to print money (quantitative easing) and other strategies like fixing the interest rates on certain sovereign bonds and more recently central banks have started buying corporate debt to prop up companies around the world.

There seems to be no sign that this will end in the short term due to recent covid economic slowdown thus continuing to drive asset prices higher irrespective of normal economic fundamentals.

A consequence of all this debt and printing money is being reflected in the price of gold. Traditional runs for safety in times of a crisis have been the US Dollar however the world is not convinced that the greenback provides the traditional safety net of the past. Hence, the haven of gold a physical, tangible asset that has reached record highs recently.

The amount of debt or bonds sold by sovereign nations globally leading into the recent pandemic was staggering. Now it’s astronomical. It was our belief prior to the downturn in March 2020 that the world as a whole was looking like it was on track to deal with the massive debt picked up after the Global Financial Crisis and then just when you thought it was safe to go back into the water – bang!

Generally speaking, the only way interest rates will rise is if we see inflation increase as global economies pick up. Now, with the total closure of most economies and massive unemployment, this is going to take some time. In short terms no cure, no economic growth, no rate rises.

We are all active participants in the economy. With interest rates at record lows, and likely to stay that way for the foreseeable future, we need to consider some fundamental questions: 

What will happen to the value of my house which has been growing for the last forty years? 

And will my blue chip bank stocks continue to deliver the rate of return seen over the last few decades?

Old-school investors, and old-school advice practitioners, have always served up a cocktail of Aussie property and the belief that you can’t go wrong owning the major bank’s shares. houses tripling in value over last twenty years and double digit returns on franked banking sector dividends, ther has been no point arguing against those set-in-stone investment principles – until now.

It’s our belief that those days are gone. Australia has made money out of digging holes in the ground, mining resources and then building a house on that hole you originally dug. Then investing your profits from the whole transaction in the bank via cash with healthy interest or buying shares

Domestic property in Australia is heading into difficult times. Recession, rising unemployment, the drying out of government stimulus, and the end of the freeze on loan repayments are all going to have a massive impact. What’s going to happen to property prices if people start foreclosing on their houses? These are massive pressures and we believe will have a significant effect on property values in the short to medium term.

For one of the first times ever, banks have reduced dividends aggressively and their earnings are also under pressure. There are major concerns around their debt books and some banks have massive fines to pay due to unscrupulous conduct. This is pretty full on. The banks will survive, but we have to ask: should I be banking my financial security by investing my entire savings in the Big Four or equivalent stocks.

What we’re trying to say here is that, while it’s understandable that investors continue with time-honoured approaches, the traditional way people have built wealth over the last 40 years is over. That narrow-minded view of investing is over. A change in mindset and approach is imperative.

Now, it’s all about having a global view of investing and having a select approach to what asset classes and sectors you invest in. Diversification is paramount.

The below chart demonstrates the benefits of diversification and the over exposure to Financials in the Australian market in particular the Big 4.

Let’s consider this scenario and ask a few questions: 

You have a house with a mortgage and that mortgage rate is currently at record lows. It’s in an area where it’s likely to be impacted by a downturn in value over the next couple of years – as a result of the global pandemic crisis and consequent recession. You are paying back the principal on that loan. 

Are you not paying back capital to a potentially depreciating asset? Is it not dissimilar to a car loan?

Would it be worth considering just paying the interest only your mortgage and redirecting that principal portion of your loan to something that could outperform not only the low interest rate but also a potentially falling house prices? What is the solution? What is a more effective strategy to approach this in the current climate?

What about some diversified investment options?  The NASDAQ (technology shares) Index is performing at an all-time high compared to traditional stock market in the United States (S&P500).

This is an example of how investing in a diversified way in the right sectors of markets globally can still help you have debt freedom and build wealth just with a decorrelated and holistic mindset.

Having all your eggs in Australian Domestic property and Bluechip shares may continue to deliver returns you need to achieve your lifestyle. However, you could see significant volatility and stressful periods when matched with a holistic diversified portfolio that has suite of assets including sectors that are doing significantly better than investing from traditional means including cash, property, bank shares etc.