Chairman’s Report: What’s a ‘safe’ investment?
Most people think a safe investment is something where you believe you will get all your money back. If this is all it takes, then there is little doubt that money in an Australian bank is a ‘safe’ investment in this sense.
But if you were investing for 20 years would you just want your money back? If you were saving for your retirement, that would not be a very ‘safe’ or wise thing to do. So ‘safe’ can have different meanings depending upon your goals.
As safe
as houses?
In the past, people have lost most of their investment
on what they thought was a safe, secure property related
investment – these were never safe for any term.
In the long-term, good property investment will prove safe, but we hear almost everyday how people have lost everything doing just that. Of course it’s not until the downturn hits that the risks are obvious.
CASE
STUDY: Losing your investment
For example, if your mortgage deposit is $20,000,
and the property price falls by just 20%, you might be faced
with the loss of your entire dollar-value investment. Table
1 shows how just a 20% reduction on a property purchase
wipes out 100% of the investment.
All
investments carry risk – what risks come with property
Investment?
You may see property investment as a ‘sure
thing’ but contrary to recent boom patterns and social
attitudes, real estate can suffer decline.
A recent study lists the top 50 world cities with the least affordable property, when viewed against the average local income, and 18 of these cities are in Australia.*
House prices going up are good for the investor, but when people have to pay 9.5 times their annual income in Mandurah, Western Australia to afford to buy property it looks like property investment has its foreseeable reasonable limits.
From an income perspective, housing investment also does not look attractive. The yield or income received from housing investment has been steadily decreasing over the years.
It is now well below the yield received from investing in Australian shares. This further highlights how expensive property is. At these levels, and combined with high interest rates, it is unlikely that property will undergo another boom time similar to that seen between 2001-2004.
Speak
to your Count Adviser about what ‘safe’ means
to you
Don’t be restricted by clichés….
‘residential property is safe’ and ‘the
share market is unsafe.’ The answer you need to know
is… safe for what? Safe for living and safe for your
investment goals may be two very different things.
Retail, commercial and industrial property are often much better investment options than residential property because their prices are determined by investors and business people and not by mums and dads who sometimes get carried away by greed, fear, and lifestyle needs.
Long-term
vs short term investment
Whilst most investments except cash are best held
for the long term, it is almost always true that residential
property, because of the difficulty in selling along with
the costs of buying and selling, is rarely a short term
investment.
Alternatively, your money might be ‘safe’ in fixed interest investments such as bonds and term deposits – but the yields can be much lower than income received from quality share dividends over the long-term, so your time frame and risk tolerance are important considerations.
The correct answer to ‘what is safe’ depends upon your needs. Whatever you decide, have a clear understanding of your needs and how much risk you are willing to accept. Property investment should generally be part of a diversified investment portfolio, and never an “all your eggs in one basket” investment solution unless you are a property specialist.
Talk to your Count Adviser about your investment needs and objectives and the choices available to you.
:: Barry Lambert
Count Founder and Executive Chairman
 Next: Financial tips for ‘back-to-school’ |
As at
8 February, 2008 |
