Australians are lucky to have an array of world-class investment options.
Talk about investments to an average Australian and the first thing they think about is property. Small wonder. There is no other asset that usually protects and grows your capital, while saving you money because you can live in it. But there are risks. Even property markets can go down. If you have an investment property, good tenants can sometimes be hard to find. Financial advisers will tell you it is better to diversify – in other words, don’t put all your eggs in one basket.
There has been a flood of new investment products in recent years, from exchange-traded funds (EFTs) to listed retail bonds, where investors can essentially lend money to corporate Australia. While some of these new and sometimes exotic investments have attracted interest, the vast majority of people come back time and again to their two favourites: bricks and mortar; and shares in dividend-paying, blue-chip Aussie companies such as the Big Four banks, mining companies Rio Tinto and BHP and the national telecommunications carrier, Telstra. It all depends, of course, on what kind of investor you want to be. Most of us are not adrenaline-charged day traders, buying and selling stocks and scouring the list of new floats.
Much has been made of Australia’s so-called love affair with property. Despite the increasing difficulties facing first home buyers trying to enter the market, Australia has one of the highest levels of property ownership in the world.
The 2011 Census shows 67 per cent of Australian households are owner-occupiers – down from about 70 per cent in 1966, but still very high. The number of households that own their home outright has fallen since 1996 from 40.9 per cent to 32.1 per cent, while the number of households that own their home with a mortgage has risen from 25.5 per cent to 34.9 per cent. So while outright home ownership is going down, the continuing and steady march of property prices is still delivering on what remains, for most people, their most important investment.
Given that the first generation of Australians who began their working life in the era of compulsory superannuation won’t begin to retire for a decade or two, the strategy around the family home remains one of the most critical investment issues people will face. The popularity of downsizing when the children have moved out and the “nest is empty” as retirement nears will most likely continue to be a key event for many people as they look to fund their retirements. And as long as rises in house prices continue to outpace inflation, this option will be attractive. Sydney’s median house price in 2003, for example, was $573,000 and in July 2015 moved through the $1 million barrier.
Property is so popular that, apart from the family home, many people aspire to be property investors, if only on a small scale. This is helped along by the federal government’s negative gearing provisions, which allow tax deductions if the interest paid on a loan is greater than the rental revenue. The percentage of investment (non owner-occupied) loans for residential property has been rising over the years. According to June 2015 figures from the Australian Prudential Regulatory Authority (APRA), 39 per cent of outstanding housing finance is on investment property.
To put this in some perspective, total residential home loans to Australian households are now at $1.33 trillion – about the same figure as the nation’s current total retirement pool in superannuation savings. And as we mention superannuation, the changing of super rules several years ago has made it possible for self-managed superannuation funds (SMSFs) to leverage and buy investment property, with restrictions.
In a hot property market, such as we have seen over 2014 and 2015, investment property is particularly attractive. Its popularity has prompted predictions that – in the present low-interest environment – rampant property investment will trigger a housing market crash. While the jury is still out on that, several banks have introduced higher rates for non-residential loans, largely under pressure from the Reserve Bank and APRA. Whether that dampens the enthusiasm for investment property remains to be seen.
- Capital gains in the past 20 years
- Times of high interest rates, or if you have borrowed more than 90 per cent of the purchase price
Blue-chip equities are hugely popular among Australian investors for two reasons: their capital gain over a long period; and their dividend stream. Take the Big Four banks, ANZ, CBA, NAB and Westpac. Their dividend stream in recent years has been at about five per cent or more before tax, meaning that as interest rates on term deposits have fallen shares are delivering some of the healthiest yields in the market. Not only are the revenue streams attractive, but there is also the capital growth. Bank shares have had a bit of a battering over 2015 as the market has slowed and investors have taken profits, but the growth in the past five years has been significant.
“sell some shares at the top of the market and keep the rest for the long haul and even buy more on the way down”
In 2010, for example, CBA shares were about $50 each. They peaked at $96 at the beginning of 2015 before sliding to about their current level of $75. For long-term investors enjoying the dividends, this is a journey they are prepared to take. A popular strategy has been to sell some shares at the top of the market and keep the rest for the long haul and even buy more on the way down, especially if they can be bought at a discount to the market via rights issues.
Another favourite stock has been Telstra, and here it’s the dividends that are more attractive than capital growth. Telstra shares first traded at $2.75 when they hit the market in 1997 and, nearly 20 years later, their growth remains unspectacular, with the stock now trading at $5.58. Telstra started delivering more back to its shareholders in 2014 and 2015’s fully franked shareholder payout is 30.5 cents, a return of better than five per cent.
If you are investing for the long haul, it is little wonder that these investments are among Australia’s most popular and likely to stay that way well into the future.
- Market volatility that erodes capital gains
Australia, because of its large and growing pool of retirement savings, has attracted a community of leading fund managers from around the world. For most of them, the objective is to manage money on behalf of the big super funds. But most also make their services available to retail investors and, of course, self-managed superannuation funds.
The benefit of managed funds is that the investment strategy is determined by a professional, often with particularly specific expertise. If you believe the global bond market is an interesting place for your money to be, there will be a managed fund for you.
Similarly, if you are interested in Asian shares, you’ll find you have several managed funds to choose from. All this enables you to get exposure to investments that, individually, would be hard to access.
Naturally, managed funds attract fees and these should be closely monitored. And, like all investments, remain aware that the value of the fund can go down as easily as it goes up.
- Exposure to investments normally difficult to access
In the wake of the 2008 global financial crisis, interest rates on term deposits were up to about eight per cent as banks scrambled for funds. Many people who had seen their super balances slump during the GFC set up SMSFs, with most using term deposits as a defensive strategy. A few years on, term deposit interest rates are about two to three per cent.
Generally, rates are higher for larger sums and if you are prepared to leave the money there long-term. But as other investments deliver better returns, term deposits have declined in popularity. Still, they remain the safest and most secure of all investments for the risk-averse.
- Safety and certainty
- Periods of low interest rates